NYSE ADVANCE-DECLINE LINE IS LAGGING BEHIND THE RECENT NYSE PRICE RISE -- IN MOST PAST CORRECTIONS, THE AD LINE HIT A NEW HIGH FIRST

NYSE AD LINE IS LAGGING... After yesterday's new record close by the Dow, I was asked several questions about market breadth. The reason for the questions is shown by Chart 1. Although the NYSE Composite Index closed just below its July peak, the NYSE Advance-Decline line is still well below its summer high. In other words, market breadth is lagging behind the price action. That would mean that any significant move into new highs by the NYSE would be "unconfirmed" by market breadth (until the AD line also hit a new high). Let's see how the two lines compared during some previous market corrections.

Chart 1

NYSE AD LINE LED PAST RALLIES... Chart 2 compares the NYSE AD (reddish line) to the NYSE Index (green line) since the start of this year. During March, both lines fell. However, the NYSE fell much further. In mid-March (as the market turned back up), the AD line hit a new high first. During the first week of July, the NYSE hit a new high while the AD line didn't. That "negative divergence" was followed by a market correction of 10%. Chart 3 shows the market correction that took place in the spring of 2006. There again, a "negative divergence" between the AD line and the NYSE was followed by a downside correction of 8%. Chart 3 also shows that the AD line hit a new high in late August, while the NYSE didn't do so until October -- two months later. At both peaks and troughs in 2006 and 2007, the AD turned down first and hit a new high first.

Chart 2

Chart 3

A LONGER-TERM LOOK ... Chart 4 compares the two lines since the bull market started in the spring of 2003. The five arrows show the NYAD line hitting a new high before the NYSE in 2003, 2004, early 2005, the summer of 2006, and early 2007. The only time where the NYSE hit a new high before the AD line was at the end of 2005 (green arrow) when the market hit a new high six weeks before the AD line. So what's the moral of this story? Five times since this bull market started, the NYSE Advance-Decline line hit a new high ahead of the NYSE Composite Index. In one instance, stocks hit a new high first. The fact that the AD line is lagging today may be a symptom of weakness in small cap stocks. Even so, the fact that market breadth is lagging behind prices on the current rally is something to keep an eye on. Until the NYSE AD line hits a new high, any upside breakout in the NYSE Index will be technically suspect.

Chart 4