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NYSE Breadth Is Strong: Why It Doesn’t Matter at Trader’s Narrative

The NYSE cumulative breadth (daily advance decline) is showing signs of life. with its first victory over a previous high:

nyse cumulative breadth Apr 2009

Referring to this, recently StockCharts blog wrote:

This show of relative strength in the AD Line reflects broad participation in the current advance and bodes well for the current uptrend.

Sounds good but what they are missing is that the cumulative advance decline line is notoriously deceptive. Although the NYSE started out as an exchange where the biggest and best US companies traded, over the years there has been a significant shift away from operating company common stocks to new and strange securities like municipal bonds ETFs, ADRs, bonds (yes, actual bonds trade on the NYSE!), etc.

At first these non-operating company securities were a small portion of the whole but over time, they have come to take such a large portion of the trading that the breadth numbers from the NYSE should be discarded. The only other option to ignoring the data is to painstakingly filter out these ‘pollutants’. There are very few services that provide such data, Lowry Research being one of them.

To see the wide discrepancy, you need only compare the NYSE cumulative breadth chart to the corresponding Nasdaq chart:

nasdaq cumulative breadth April 2009

The difference between the two becomes especially large when interest rate changes. This is because most of the non-operating company securities are interest rate sensitive (like the municipal bond funds) and they move as a herd either up or down in reaction to different interest rate environments, skewing the NYSE breadth.

If we step back and look at a very long term chart of cumulative breadth for both the NYSE and Nasdaq, it becomes clear that this indicator isn’t really helpful at all. This is why, instead of the cumulative measure, I prefer to look at a simple moving average of advance decline numbers. This indicator, in contrast, is useful for both the Nasdaq and NYSE exchanges by highlighting both kinds of extremes in the market.

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7 Responses to “NYSE Breadth Is Strong: Why It Doesn’t Matter”  

  1. 1 Dave

    “…the breadth numbers from the NYSE either have to be discarded.” Either ? Either what ? Left hanging out here. Either/or ?

    The inverse ETF’s further pollute the A/D data.

  2. 2 Babak

    Dave, just testing to see if you’re paying attention. lol
    Fixed it.

    The inverse ETFs are the spawn of the Devil. They not only skew the AD but they’re probably one of the main culprits for the crazy volatility we’re seeing, especially at contra hour. Here’s the article which I featured at 8 days ago.

  3. 3 Dave


    Thank you, Sir. You had me cross-eyed. LOL However, the main thrust of your post was VERY important. I assume that you’re familiar with Terry Laundry & his T-Theory. I wonder if he has considered your points because his Monday Update was based upon the A-D surpassing the January 09 highs.

    I had already read your inverse ETF article of 8 days ago. Although i am familiar with that supposition made previously by others, yours was the first that i actually took the time to read. Thank you again.


  4. 4 Babak

    Dave, thanks, I’m somewhat familiar with Terry’s “T-theory” but hadn’t looked in on him in a while. I just checked out his most recent post where he uses the NYSE cumulative breadth chart. I’d leave a question but he’s got comments turned off and I don’t see any other way of reaching him. I’d be curious to know how he would respond.

    I wonder if anyone has kept breadth numbers for the S&P 500. Seems obvious but I never thought of it. Is that even possible?

  5. 5 Dave


    One thing (among several) that made trading more difficult after last Oct/Nov was the difference between the S&P500 & the Nasdaq/NDX because of the prevalence of energy & financial stks in the S&P & their largely absence in the Nasdaq. Energy & financial stks were in a much worse bear mkt not only % wise, but also in persistence day-after-day which would affect the A-D. Otherwise, normally, i agree with you that the S&P would be a much better measure for breadth.

    Terry Laundry partially addressed the matter that you & i are discussing by saying something about % of stks advancing or declining, but i think that that only partially addresses the matter because of the # of ETF’s, prefereds, etc still qualitatively skews the data IMO.

    However, you can see from his chart that a lot is riding on the quality of the ingoing A-D info. And you know the old saying about “GIGO” :)


  6. 6 ms

    You gotta be sorry you ignored this indicator. Even though it is “polluted”, it does not need to be pure to be useful. It is all about context. You are bad mouthing a good indicator at your peril.

  7. 7 Babak

    ms, not at all; there are many other indicators which were bullish. For example, just a few days after I wrote the above, I wrote about the Coppock Curve giving an imminent bullish signal. It is important to understand why an indicator works and what goes into it. Otherwise, you’re just engaged in sophisticated voodoo.

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