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NYSE Cumulative Breadth Hits New High But… at Trader’s Narrative

On Monday the NYSE Cumulative Advance Decline line reached a new all time high. For obvious reasons that turned a lot heads in the technical analysis community. After all, this happens relatively rarely and it is interpreted as a bullish omen for obvious reasons.

Click to see larger chart in new tab:
NYSE cumulative breadth Aug 2010

While I acknowledge the occurrence, I’m not completely persuaded to join the bullish camp. For starters, one single indicator rarely convinces me of anything. And when we look for confirmation of underlying strength in the market, there is precious few corroborating data points.

Personally, I prefer to look at the “clean” version of advance decline breadth because the NYSE has too much non-operating company stocks trading on it these days. Turning to the Cumulative Advance Decline for the S&P 500 we see that it is still far from reaching new highs:

Click to see larger chart in new tab:
S&P500 cumulative advance decline Aug 2010

On the plus side, the positive divergence in breadth that we’ve noted for a while is still in effect. That is to say while the S&P 500 index itself fell below its February level, the breadth measure didn’t.

Another market internal metric I monitor is the percentage of stocks trading above their long term average. Currently the percentage of S&P 500 components trading above their 150 moving day average is still struggling to put in a higher high and to reach cyclical bull market levels once again. Yesterday it fell after almost reaching its previous high in mid-June (59%). But it yet to decisively break the down trend (lower lows and lower highs) in effect since May and which I showed previously in this chart: Continuing Weakness from Price & Breadth.

While the long term measure of breadth is still rather weak, the medium term measure (percentage above 50 day moving average) is at 75%. This is not only high on a nominal basis (close to reaching extremes in the 80-90% range), it is also much higher than the mid-June peak (46%). Usually, stocks have a difficult time continuing to rally when most stocks are trading above their 50 day moving average. The exception is at the start of cyclical or secular bull markets when we strap on the afterburners.

Finally, the Nasdaq McClellan Oscillator (Ratio Adjusted) recently hit a high not seen since March 2009 - when we did in fact strap on the afterburners:

Nasdaq McClellan Oscillator Aug 2010

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17 Responses to “NYSE Cumulative Breadth Hits New High But…”  

  1. 1 steve

    I was looking earlier at the Advance-Decline line on the S P and NYSE .

    I noted that on both both these indices, the sharp move up on Monday to a high for this 4 week old rally above last week’s highs, was not supported by new highs on the A-D lines above last week’s rally high. - I’m not sure how significant this is, but on a number of prior occasions where this had occurred a correction followed.

    regards Steve

  2. 2 MatthewC

    Remember, more than 50% of the NYSE is comprised of interest sensitive, non-operating companies such ETFs, Closed End Bond Funds, Preferred’s, and foreigh ADRs. When we substract out those foreign and interest sensitive investments, and examine solely the operating companies, the Advance Decline is no where near a new high.

    This means that the Advance Decline is led by ETF’s etc that respond to the bond market or are correlated with foreign markets.

  3. 3 Wes

    The current rally started with intense negative sentiment. I don’t think most technical and fundamental considerations will matter much or for long.

    I’m expecting this rally to only be stopped by intense positive sentiment.

  4. 4 Yowsers

    All the prior highs would be just as compromised, too. The recent compromised high would be roughly equal to the prior compromised highs, even if we know that the actual data reading is polluted with garbage data points.

  5. 5 Elizabeth

    Great comments–love the way the blog threw it out there and other informed folks chimed in. Really helps my trading to take it all in. Thanks all…

  6. 6 OntheMoney

    Wes, consider the possibility that the market topped in April, when there was plenty of intense positive market sentiment. Mark Hulbert’s Nasdaq sentiment had only ever been higher at the dot-com peak in 2000. Scores of Jason Geopfort’s sentiment measures were screaming for a top while the OEX smart money were not joining in the euphoria - just like in 2007.

    Matthew C’s excellent post today adds further evidence of a topping process comparable to ‘07 (the price analog itself is notable). Combine these intermarket factors with sagging US economic indicators, austerity measures in Europe which are starting to have a major slowing effect at least in the UK, a pulling back of Chinese growth plus, on the technical front, the major momentum peak and its precedents which I pointed to in a post earlier this year (see Chart of the Century, here) the odds have tipped overwhelmingly in favour of a top at S&P 1220.

    If we’re lucky, precedents suggest we’ll be in a trading range for another 12 months or so and then break up; if not, I believe 1220 is a ceiling stocks won’t overcome for years.

  7. 7 Wes


    You’re certainly correct that sentiment is an unreliable indicator at tops, but I was commenting on a bottom.

  8. 8 OntheMoney

    Wes -

    You’re absolutely right that sentiment at the recent low was extremely negative and kick-started the move higher. What I’m suggesting is that instead of, as you say, ‘expecting this rally to be stopped by intense positive sentiment’, we could very easily stall out BEFORE it becomes intensely positive, catching bulls unawares. This is what happened with many sentiment measures in 2007.

    I was bullish for too long in late ‘07, partly because the OEX traders had not reached prior levels of put buying which had previously marked a top. Instead, as the bear market took hold, they started steadily buying calls and continued doing so right through 2008! Anyone following their moves without a balance of other indicators would have been destroyed. What I hadn’t realized was that these smart money players clearly employ different hedging strategies in bear market environments.

    The long term volatility bands for the OEX, as charted by Geopfert, have now turned lower - just as they did at the turning points of 2000 and 2007. Beware!

  9. 9 rob

    onthemoney, I don’t understand a few points in your two posts

    “Scores of Jason Geopfort’s sentiment measures were screaming for a top while the OEX smart money were not joining in the euphoria - just like in 2007.”

    Do u mean to say that the OEX players were not buying puts at the april top but that Goepfort’s sentiment measures called the top correctly?

    and what does this mean?
    The long term volatility bands for the OEX, as charted by Geopfert, have now turned lower - just as they did at the turning points of 2000 and 2007. Beware! ”

  10. 10 OntheMoney

    Hi Rob

    Sorry this explanation is so long but Jason’s charts are copyright so sadly I can’t illustrate my point. But here are a thousand words instead!

    The Sentimentrader site tracks dozens of sentiment measures, including the OEX options guys. On the ramp up from February to April, as traders gradually travelled from the ocean of fear to the land of greed, these measures became overwhelmingly bearish.

    For example, one measure computes total speculative option activity from all US exchanges, and by April it had hit levels higher than it had at the 2007 top. This was not un-typical. By mid April, almost half his indicators were at a bearish extreme, while zero were at a bullish extreme. On a contrary basis, this suggests strongly that, at the very least, a multi-week top is approaching.

    The OEX traders however are an excellent smart-money, non-contrary indicator. Jason tracks their put/call ratio with raw data and also creates moving average charts on a short, medium and long-term basis to smooth out the whipsaws. To take account of trending drift over long periods he then surrounds these averages with bands at 1 & 2 standard deviations of the one-year mean. When the longest-term moving average reaches an extreme at its upper band - meaning the OEX traders are consistently buying many more puts than calls - it’s reliably a good time to get out of the market.

    Well, it hit extremes in January 2010, warning of the correction into February. Then these traders smartly bought shed-loads of calls right at the bottom. However, for some reason, they were slow to buy puts as the market rose into April (with a very brief spike at the peak) and have not shown much interest since, tending to buy more calls than puts on the way down into July. In the process. this has dragged down the one-year mean and turned the std deviation bands lower. This behaviour last occured in the fall of 2007, and the time before that, in fall 2000. It has not occured during the bull market periods before or in between.

    Exactly why they didn’t go crazy on puts I can’t say, but there’s no need to explain it away - the pattern is clear and along with any number of other indicators confirms my cautious view. Until the OEX traders start behaving again as they did before April the message they appear to be sending is, watch out: bear market conditions now apply.

  11. 11 Wes


    I hardly recognize the actions of the OEX traders from your descriptions. I think it may be a very bad idea to follow their actions with a trending drift, although I use that technique with some of the other option traders.

    On an absolute scale, the 15DMA of the OEX option traders is very bearish above 170 (puts per 100 calls), bearish above 140, mildly bullish at 100, bullish below 95, very bullish below 80 and extremely bullish below 55.

    Now I always interpret their actions with their OEX put/call open interest, because they can throw intra-day curveballs by not taking all their daily positions home with them.

    Viewed in this way, there has been little ambiguity. They were clearly bearish in October of 07 (in fact they were bearish almost all the way through 07). As you said they were bearish in January. They were undecided (between bullish and bearish) from February to May, and clearly bullish since.

    I interpreted their actions from Feb to May as them being dissatisfied with the shallowness of the February correction, but that’s just a guess.

    Having said all this, I’m still of the opinion that it’s all about sentiment, now.

  12. 12

    Hi Babak,

    I dont buy the bullish case either. The economic funamentals do not justify it. The non farm payrollls proved that there is no recovery without government stimulus. right now I am mostly in cash because of the erratic movements in the market.

  13. 13 OntheMoney

    Wes, I guess we’re looking at the same data just through different lenses. So much for objective sentiment analysis!

    I find the std dev bands actually work very well, since in trending markets the threshold for knowing where a signal is strongly bullish or bearish changes dependent on the state of the market. For instance you could have shorted at 140 puts per 100 calls (on a 21-day basis, from JG’s data) between 2003 and mid 2006. But from late 2006 to the top in ‘07 that would have got you in trouble as the market kept on pushing higher.

    Same applies in reverse to a bear market - buying calls during the 2006-07 period would have worked anytime the 21-day MA dipped below a ratio of 1.3. But during early ‘08 that would have made you a buyer all the way down into the March low! Same trap woulda got you in late 2000 into January ‘01 as the S&P was falling into bear territory. That’s what concerns me here.

    Figuring out when the trend has changed is the key, and that’s what makes the recent rolling over of the volatility bands a useful clue.

    I checked the open interest, which Jason also tracks, and you’re right about the 2007 top. Problem is the 2000 top. Open interest peaked in late 1999, then fell to absolute levels we’d associate with bullishness (0.8) in September 2000 - right as the S&P rolled over. They stayed low, with modest pushes towards 1.4, all the way through 2002.

    Bottom line: I’m not expecting another blow off top in sentiment to help me time my exit, as I think that was in April. If we get another one that’s great, but I’m not counting on it.

  14. 14 Kevin

    Any way I can get the S&P 500 AD line for myself? This article was incredibly helpful, thanks!

  15. 15 Vikram

    With increased correlations the A/D stats are much less meaningful than they used to be. We have 90% days with extraordinary regularity and hence the cumulative A/D lines now have stronger trends. When the move up, the move up with strong momentum; when they move down they do the same. Market breadth as an indicator of underlying market fundamentals is less effective in this environment. Perhaps what is more relevant is the percentage statistics of stocks above their 50, 150, and 200 Day averages across different indices. That picture is still not too pretty. After all, it is also a market of stocks.

  16. 16 rob


    Thanks for taking the time to write a detailed explanation. Appreciate it.

  17. 17 TECHIE

    A/D Line as used is of little value unless coupled with some form of volume indicator. This may sound a bit out of place, but have utilized a prop indicator which has served me well for 20 or so years.
    I see that a former post talks about the 07 top. Have a look at the secondary top in early 10/07 and note the date in 1987. NO COINCIDENCE.

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