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Large Caps Take Lead, Propelled By Positive Breadth at Trader’s Narrative

With today’s performance, the S&P 500 eeked out the highest close for the year (+5.65%). Perhaps even more noteworthy was the concomitant rise in the S&P 500 index advance decline line.

You might recall that last month we looked at the cumulative S&P 500 index advance decline line as a preferred breadth indicator. This is a simple and effective way to side-step the NYSE breadth index which has become far too polluted with non-operating companies.

While the S&P 500 AD line relies on a much narrower sample of securities than the NYSE AD line, it is of much higher quality because it exclusively represents stocks - not bonds, ETFs, CEFs, etc. So if you are staring aghast at your monitor watching the stock market shrug off every single obstacle and climb higher, this is an important explanation.

Click to see larger version in new tab:
S&P500 cumulative advance decline Apr 2010

The above chart is a short term look at the AD line - you can see two charts with longer time horizons here. Today’s close just barely passed last Tuesday’s (March 23rd 2010) high of 13213.

While the AD line suggests that the advance was ubiquitous, it is also important to note that the new yearly high was made mostly thanks to large caps. The S&P 500 index closed higher as did the S&P 100 index and the Dow Jones Industrial. But the NASDAQ Composite didn’t. Nor did the small caps, which is surprising given their recent bout of relative strength. So the market is hardly firing on all cylinders here.

In the end, all this tells us is that market breadth continues to lead or match the equity indexes. It is no guarantee against a short term correction. In fact given the current extremely optimistic sentiment, I’m not sure how many more points the S&P 500 can climb. Based on previous patterns, it is already on borrowed time.

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4 Responses to “Large Caps Take Lead, Propelled By Positive Breadth”  

  1. 1 skogie1

    Where do you find the S&P AD line? Thanks.

  2. 2 Daniel

    No need to explain again, Babak, it’s intuitively obvious why a clean all-stock A/D Index is as needed as an all-stock Price Index. Truly needed.

    A/D was the heart and sole of the great Timing Models of the 1970s and 80s. Its ‘pollution’ as you accurately put it is a tragedy, comparable to the pollution of our great lakes and rivers.

    To echo the previous comment, could there (hopefully) already BE such a place, where an index of this nature could be custom-ordered, for other market slice and dice clusters like SP Midcap 400 or SML-600?

    Does Stockcharts or a similar plain vanilla type competitor have such an option, on a more premium plan..?

    Thanks for another consistently excellent thought piece. But if I may quibble with the title, can it EVER be said that the Large Caps take the lead, or is it more that they periodically enter a period of ‘catching up’, while the more agressive normal leaders take a breather?


  3. 3 Rennie

    I’d like to see an overlay of the SPX cumulative breadth line and the NYSE cumulative breadth along with examples where the SPX breadth proved more useful/accurate than NYSE breadth. I hear a lot of talk on this subject but see very little evidence.

    I assume you also think the NYSE TICK is therefore too polluted as well?

  4. 4 Babak

    skogie, the cum. AD line chart is from Bloomberg

    Daniel, I don’t think stockcharts has it but you could ask them. Theoretically, you should be able to have it for any subset of stocks or sectors.

    re large caps vs. small caps, you’re right in that right now the small caps have the lead and this is a bit of a breather. Just wanted to be clear that this recent push up has been powered predominantly by large caps.

    Rennie, I’ve shown a similar (not exact) chart which shows the divergence here. Also, check out late 2007 to early 2008 - the NYSE cum.

    Theoretically, the two don’t have to ALWAYS differ. There is a marked difference when interest rate expectations change because this causes a lot of the bonds, munis, etc. to move all in concert. If that is opposite the movement of the stocks, then it makes the AD line look weaker, if it is in the same direction, it makes the AD line much stronger than it otherwise would be. So why not just look at pure operating company AD?

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