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S&P 500 Cumulative Advance Decline At New High at Trader’s Narrative

As the market has melted up these past few weeks, it has been fully sustained by the market breadth. In fact, many times breadth, as defined by the cumulative advance decline line has lead the market higher, suggesting that there is a surprising amount of strength under the headline indexes.

We looked at this last month: Market Breadth Leads The S&P 500 Index Higher and again as large caps took the lead and propelled the market higher. For an explanation of why I prefer this instead of the more popular NYSE cumulative advance decline line, see our previous discussions (links above).

The S&P 500 index cumulative advance decline line has now definitively broken up to a new high. Technically, it surpassed the previous high set on October 12th 2007 (13,787) yesterday. But since it just barely closed higher (13,790) I waited until today’s close which put it at 14,073:

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S&P 500 index cumulative advance decline Apr 2010

Since the cumulative advance decline line usually tops out ahead of the market, this is a vote of confidence for the cyclical bull market. Keep in mind though that there is no such thing as a “perfect” indicator - case in point, at the 2007 top the breadth peaked as did the market. Even so, as we watch the US equity market continue to advance, as long as the breadth either keeps pace or is ahead, this is a strong indication of real widespread buying.

New Highs
Similar to the breadth, the number of new highs is another indication of the health of a bull market. And just like it, this metric also tops out ahead of the market. But for now we are seeing the number of new highs in both the NASDAQ and the NYSE reach new highs. The exact numbers differ depending on the quote provider. According to Thomson/Reuters, the NASDAQ had 353 new 52 week highs - this is itself a new multi-year high. And for the NYSE: 587 new 52 week highs, also a new multi-year high.

Lowry Research
Lowry Research’s proprietary indicators of supply and demand show Buying Power in a clear and continuing uptrend. And Selling Pressure is in a mirror opposite trend, continuing to go down. Lowry believes that any weakness would hurt large-caps more because small-caps continue to display a much higher relative strength.

Fund Flows
Finally, according to ICI data, US investors may finally be returning slowly to the stock market. While it may be too early to claim that definitively, for first week of April, mutual fund inflows of $2 billion were directed to US equity funds. If that trend keeps up or accelerates, we may see the very first signs of a reversal in the retail investors love affair with bonds.

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5 Responses to “S&P 500 Cumulative Advance Decline At New High”  

  1. 1 Ken

    It also hit a new low @ the March 09 bottom–so by that then we should have just kept falling correct?

  2. 2 Adrian

    By the tone of this article, bullish will lead to market advance, and market advance will lead to more bullishness etc. Therefore, we are in an infinite bull market !
    Just like economists, most analysts can only extrapolate trends in one direction.

  3. 3 Trade to win

    Ken: of course, it’s a lagging indicator, based upon historical data.

    That said, lagging indicators are all you have at the close of the market to further analyze the direction of the broad market.

    AD breadth measurements are just another useful tool in the box, no substitute for risk management, and position sizing techniques which are designed to protect capital.

    Winning this game takes balls, period. Winning it intelligently, should not.

  4. 4 Jody

    Dear Babak, you state that the cumulative advance decline line tops ahead of the market. What makes you think it does? When I look at it it seems to top/bottom pretty much exactly at the same time as the market, i.e. doesn’t tell anything in that regard. Using this indicator for getting confidence in the continuation of the bull market seems like a self-fulfilling prophecy.

    In fact, when I look at the chart, it tells me exactly the opposite you concluded. To me it just looks downright scary. Swinging from one extreme to the other in a short period of time rarely is healthy.

  5. 5 Tom

    Market looks extremely stretched. Maybe this is the year to sell in May and go away?

    It keeps on trucking for now though.

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