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How Cumulative Breadth Can Mislead You at Trader’s Narrative

If you’ve read this blog for some time you know that I’m a great fan of popping the hood on price and looking at what is really driving the market (Market Internals). One great indicator is the advance decline number which shows you, on any given day, how many stocks closed up and how many closed down.

Since this indicator can have wild swings from one extreme to the other the daily chart looks too “noisy” to be of any value. We can take out the noise by using a moving average or we can calculate a running total by adding each successive day to the previous and make it a cumulative indicator.

nasdaq cumulative breadth negative divergence.pngHere’s a typical way that this indicator is used (see graph on left). It comes from Michael Panzner who writes in the AOL money&finance blog.

He concludes from the graph that “since mid-April, this popular measure of market breadth has been something of a laggard, despite the fact that the technology-laden index has been trading near multi-year highs.” While not calling for a crash, he says that this means that the bulls will have to “tread carefully” because the “market lacks the broad participation necessary for a sustainable advance”.

Sounds reasonable, right? Let me show you why its incorrect.

First of all, we have to step back and take more data into consideration.

The graph below shows the Nasdaq cumulative advance decline numbers from around September 2005 to today. The red box contains the graph that Panzner shows above:

NASDAQ cumulative breadth 2005-2007 daily chart.png
nasdaq composite 2005 - 2007 daily chart.png

Things sure look different now, don’t they?

Negative divergences are all over the place. But the market actually goes up. In fact, if you keep going back historically you find that this is the norm. The long term Nasdaq cumulative breadth index looks like a ski hill with a few moguls here and there pausing the decline momentarily.

Very strange. Logic would seem to dictate that a stock market needs advancing stocks to power ahead. So why is it that we see a disconnect between a persistently falling cumulative breadth with lower lows and lower highs, and the market?

Believe it or not, there is a very good reason. But it is not apparent to everyone. It sure wasn’t apparent to me either. A few years ago when I noticed this strange and persistence divergence I contacted one of the best technical analysts that I knew: Helene Meisler. She was kind enough to school me.

From that point on I never bothered looking at a cumultive breadth graph again (until now) and instead used the moving average of advancers and decliners.

I’m surprised that Michael Panzner, who is as his blurb claims, is a 25 year veteran of the markets, doesn’t know. Or perhaps he does and purposefully cuts off his graph (red box above) at just the right spot to buttress his claim.

Hmm… do you think it might have anything to do with the fact that Michael Panzner is the author of “Financial Armageddon: Protecting Your Future from Four Impending Catastrophes“?

Such bombastic predictions may sell books but they won’t do much for your portfolio.

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10 Responses to “How Cumulative Breadth Can Mislead You”  

  1. 1 Michael Panzner

    It is ironic that you accused me of misleading readers. You quote me out of context and distort my worlds to achieve the same aim.

    Here’s what I wrote: “While not necessarily a sign of trouble ahead, this sort of divergence often signals that a market lacks the broad participation necessary for a sustainable advance.” I also wrote “Like other recent indicators, it also suggests that the bulls need to tread carefully in the current environment, at least with respect to technology shares.” For some reason, you left off the first part of both sentences. Hmm, I wonder why? Trying to make a point about how clever you are, perhaps?

    In addition, you forgot to mention that I am the author of two books, Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle: An Insider’s Guide to Successful Investing in a Changing World (which was not bearish, in case you were wondering). Your inclusion of only one title gives the impression that my view is solely driven by my latest book.

    You also make reference to my “bombastic” predictions without actually having read the book to see why I feel the way I do, which speaks volumes about your approach to analysis. I at least have a logical basis for my argument.

    If you read all of my posts at, you will find that they cover a lot of ground. My second to last post was “Rising ‘Spider’ turnover — what does it mean?” [], which discusses the relative increase in volume of the S&P 500 ETFs to that of the overall market.

    Finally, there are more than two years worth of graphs at the site of my first book, some of which are bearish and some of which are bullish. []

    Yes, I am very bearish right now, for fundamental as well as technical reasons. This is a very dangerous market envirnoment, and those who lack experience in all kinds of markets and under a variety of trading conditions can’t really appreciate that.

    I guess to some so-called trading “experts,” ignorance is bliss.

  2. 2 Babak


    Thanks for dropping by and commenting.

    I didn’t accuse you of misleading readers - I was pointing out that you are very biased. And, how do you know that I haven’t read your book? In any case, I’d prefer to talk about the topic and not get personal.

    The point is that if we look at a long term graph of the Nasdaq cumulative adv-dec it is easy to see the fallacy of trying to wring any sort of significance from it for the market as it has been in perpetual decline.

    Perhaps you would care to take a look at such a chart and then perhaps reconsider your current bearish position.


  3. 3 dk

    Interesting post. Your cumulative breadth observations are dead on, and it’s a pattern I’ve observed and charted for some time. Incidentally, the McClellan’s NASI is another breadth indicator that shows this divergence with NASDAQ price. In fact, NASI contour bears a striking resemblence cumulative A/D.

    The only problem is that you neglected to cite the “very good reason” Meisler helped you identify for the cumulative price/breadth divergence! My own work led me to smooth $NAAD with EMA 5 and 20, and I’d love to understand the underlying logic of why this works so much more reliably than cuimulative metrics. Thanks….dk

  4. 4 Babak

    thanks. re the why, I hesitated to write about it because it doesn’t seem to follow logic. If I remember correctly, Helene told me that this was something she had observed “forever” and it was caused by the myriad new issues that come to market but “do nothing”, meaning that they go down, then flop around in very low ranges. This skews the data and produces the “ski hill” phenomena.

    Does that makes sense? logically no. Because you would expect such “loser” stocks to have a neutral effect as they flop positive one day, then negative the next. But the fact that they perpetually go down, may have something to do with it.

    The NASI is built on the same inputs so I’m not surprised it shows you similar characteristics. Hope that helps,

  5. 5 dk

    Hi Babak…Thanks so much for the explanation. I wish I could find more data on Meisler’s “weak IPO” theory for NASDAQ cumulative breadth underperformance. Cumulative breadth on the NYSE is starkly different, i.e. very positive. Your original post was a timely one, as I’ve noticed more and more recent chatter about breadth divergence. Thanks again…good stuff around here….dk

  6. 6 Babak

    you’re welcome. If you do find anything, let me know!

    as for the NYSE breadth, that’s a whole ‘nother animal. For the past dozen or so years the NYSE has been infiltrated with non-common stock securities. Bonds (like the GM ones), munis, CEFs, and other weird and woolly animals that bear no resemblance to honest to goodness equities.

    The result is that it has totally messed up the breadth numbers. Smart people (like Lowry’s) have worked very hard to keep a pruned list of only common stock breadth. But this sort of info is not readily available for free.

    I suspect that the two breadth numbers look nothing alike.

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