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