I have written on this subject before, but I was inspired by a recent article by Larry McMillan (optionstrategist.com) to visit if again.
Recently the NYSE A-D Line hit new all-time highs, and this is being cited as strong evidence that the market is headed higher. Unfortunately, this is a case of bullish analysts shopping for indicators that support their case, and ignoring indicators that don't. Here's why.
The NYSE Advance-Decline Line is a cumulative total of each day's advancing issues minus declining issues. It is one of the oldest, simplest, most widely watched, and, until recently, most useful technical indicators in existence. The problem is that the NYSE Composite Index is composed of about 2,040 common stocks, but the advance-decline data published by the exchange (and used to calculate the Advance-Decline Line) is derived from all issues traded on the NYSE, about 3,500 issues, many of which are interest rate sensitive and are more of a reflection of what is happening in the bond market than the stock market. Because of this, NYSE breadth (advance-decline) data and many of the indicators that use it should, in my opinion, be considered unreliable.
This doesn't mean that usable breadth data aren't available. There is, of course, the Nasdaq Composite Index, and at DecisionPoint.com we calculate advance-decline data for the S&P 500, S&P 100, Nasdaq 100, S&P 400 Mid-Cap, and S&P 600 Small-Cap Indexes. All of these are composed only of common stocks, and they give a completely accurate picture of breadth for each of those market indexes.
In the chart above we compare several A-D Lines. As you can clearly see, the NYSE A-D Line is completely disconnected from the price index and bears no similarity whatsoever to the other A-D Lines. NYSE breadth numbers may be telling us something, but, as yet, I don't think anyone has figured out exactly what it is.
We are planning to develop a common stock only version of the NYSE Composite A-D Line, but I think it will add little to the coverage we already have. The A-D Lines for the S&P 500 and Nasdaq 100 Indexes provide individual indicators that are directly related to those specific indexes, and this quite important considering how many people trade those indexes.