What is the significance of advancing versus declining issues? (May 25, 2000)
Not as much as some place on it. Last November and December when the market was rallying to new highs every other day, we had a daily report from some of our favorite television commentators about the atrocious advance/decline line. Declining issues were beating advancing issues steadily, but the market was rising. We kept hearing that it could not go on.
Well, it won't forever, but the A/D line or ratio is very bad at telling us WHEN it will end. Rallies can last for months as the A/D line heads lower and lower. So, on the upside it tells us very little about when a rally will end.
The best use for the A/D line, other than just telling us how broad a rally is, is to help us see when a bottom may be forming. When the market starts a turn back up from a correction, we want to see most of all strong volume. Other factors, however, add to the evidence of a reversal. One is a strong A/D ratio. We like to see advancing issues beating decliners 2 to 1, and a 3 to 1 ratio is what we really like to see. That shows us the move is broad-based, and with the volume, it is another signal that there is a lot of serious buying going on. We saw that back when we called the turn in October 1999.
That is the best use of the A/D line. We keep track of it at these times because we want to see if it is tracking strong volume days. As we noted on Wednesday, it did not do so as the market rallied on strong volume. Again, we are still waiting.
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