AD line
Source: Chart courtesy of Carl Swenlin, Decision Point (annotations by Ritholtz)


One of the best ways to identify a market that is exhausted is to look for divergences between Breadth (i.e. the number of advancing equities versus the number of declining ones) and Price (i.e. new highs). That is a concept that Paul Desmond of Lowry Research has researched and written about many times over the years.

As the chart shows, markets saw major divergences in both 2000 and 2008, as stocks continued to make new highs in prices but failed to do so in the advance-decline line. Prices kept rising, but fewer and fewer issues were participating in the new highs.

Typically, this is reflective of a narrow market being dragged upward by a handful of mega-cap stocks.

That is not what we see today. Market breadth remains broad, with lots of equities participating in the rally. There is not any major divergence between the advance-decline line and equity prices. Hence, the breadth is confirming price, strongly suggesting that this current bull market rally is not over.

Timers and top-callers be warned: We may certainly have minor or intermediate corrections, but this remains a bull market.

Note: We will explore this issue in greater detail at some future date.



Category: Markets, Psychology, Technical Analysis

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7 Responses to “Advance Decline Line (Market Breadth) Says No Top Yet”

  1. rd says:

    This is one of the indicators that I have been watching that makes me concerned the Fed has become too focused on the “wealth effect” as manifested by the stock market that they have stepped in every time there was a hint of a small type of correction and re-alignment in the market. They may be simply allowing larger instabilities to form over time that will manifest themselves suddenly and all at once with another 60% drop. I don’t think it is coincidental that this period of Fed activism regarding stock market valuations by both Greenspan and Bernanke has resulted in two of the biggest market plunges in history along with a major financial crisis and are again currently piling up some of the highest historical readings in valuation indices.

    The Fed seems determined to push everybody to “keep dancing” as Richard Fuld so memorably put it. The primary question is when the economic motor will be able to keep running without constant priming and pulling of the starter cord.

  2. [...] "Breadth is confirming price, strongly suggesting that this current bull market rally is not over." Advance Decline Line (Market Breadth) Says No Top Yet | The Big Picture [...]

  3. courageandmoney says:

    I would be curious to see what 1987 and 1998 asian crisis look like on this chart. The real questions is do we need to be in a bubble for a 20% correction? I didn’t see a bubble in 2011, just a spoked market…As we go higher that 20% or even 10% looks like a alot of handles…..Long is the only game in town, for now.

  4. jaysan says:

    The NYSE a-d line for stocks of corporations is a more accurate indicator, since the bond funds in the usual a-d calculation distort the data that truly concerns us.

    I don’t recall where one can find that a-d line. Anyone here know?

  5. A says:

    An excellent technical tool to track closely.

    Please stay put at least until we’re in a new tax year.

    Some great profits to be taken (then).