Market Pulse: Advance-Decline Line points to higher prices
I have moved to a new office across the hospital building at 889 Alder Avenue and invite you drop-in to discuss the markets and see my stocks-only Advance-Decline Line indicator, my single best indicator for predicting market tops.
Is the market forming a top now? An Advance-Decline Line compares the advancing stocks on the NYSE to the declining stocks. When the Advance Decline Line is stronger than the S&P 500 index, there is broad market participation.
In effect, the troops are leading the generals. When the S&P 500 is stronger, however, market breadth is poor, which serves as a warning flag that the risk is increasing.
Unfortunately, the indicator found in financial publications does not always represent what is actually happening to the underlying market. That is because nearly half of the NYSE issues are preferred issues, closed-end funds, stock funds, ADRs, and warrants.
Therefore, while the advancing and declining figures are technically correct, they are misleading because about half of the issues represent “irregular” securities.
To correct that, I calculate an Advance Decline Line from the price activity of the 1,500 common stocks that comprise the S&P 1500 index.
So what is this indicator saying now? It’s good news. Our stocks-only Advance Decline Line reached a new 52-week high on September 18, confirming the new high in the S&P 500.
It was also stronger than the S&P 500 during the recent sell-off. Far from showing a negative divergence, this indicator predicts higher prices ahead.
The congressional nonsense is serving to increase volatility, but the markets will start to look past this. The overall trend remains higher as the broader market (and Nasdaq) is outperforming the Dow and S&P 500.
My stocks-only Advance-Decline Line is just a few good days away from reaching its high. Bottom line: the market is not topping out.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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