ONLY ONE VERSION OF THE NYSE ADVANCE-DECLINE LINE HAS HIT A NEW RECORD -- THE VERSION THAT INCLUDES COMMON STOCKS ONLY HASN'T -- RECENT HISTORY FAVORS THE MORE TRADITIONAL VERSION -- NYSE COMPOSITE INDEX STALLS AT NOVEMBER HIGH
THE TRADITIONAL NYAD LINE HITS NEW RECORD... Chartists look to the NYSE Advance-Decline line to help determine the trend of the stock market. The NYAD line is simply a running cumulative total of the number of advancing stocks minus decliners on the big board. And it has a good track record of leading turns in the stock market itself. Chart 1 shows the traditional version of the NYAD line peaking last May which warned of a market downturn that started last summer and lasted into this year. Chart 1 also shows the advance-decline hitting a record high this spring. That's a very positive sign for the stock market. Not all chartists agree, however, that the line in Chart 1 truly represents the market. That's because it includes a number of issues that aren't true common stocks -- like preferred stocks and entities more closely tied to the bond market. Those chartists believe that a correct version of the advance-decline should include only common stocks.
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Chart 1
NYSE COMMON STOCK ONLY AD LINE ISN'T AS STRONG... Chart 2 shows the NYSE Common Stock Only (CSO) Advance-Decline line. As the name implies, this version of the AD line includes only common stocks. That version of the line also peaked last May and bottomed during February. It has since then exceeded its fourth quarter high and reached the highest level since last July. What the AD line hasn't done is move above last May's peak to a new record. So it doesn't look as impressive as the more traditional version in Chart 1. Although its intermediate trend is clearly higher, the fact that it hasn't hit a new record leaves in some doubt the issue of whether stock indexes will reach new highs. Historically, however, it should be pointed out that this version of the advance-decline usually lags behind the more traditional version.
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Chart 2
THE TRADITIONAL AD LINE TURNED UP FIRST IN 2009... The next two charts compare the two versions of the NYSE AD line at the 2009 bottom and coming out of the 2011 market correction. Chart 4 shows both AD lines peaking together in 2007 (giving an early bear market warning) and bottoming together in March 2009. The more traditional green AD line rose much faster than the black line which includes only common stocks. The slower black CSO line turned up that July three months after the green line. By that summer, both versions of the NYSE AD line were in uptrends as was the market itself. But the green line turned up first.
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Chart 3
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Chart 4
AND AGAIN IN 2012... Chart 5 compares the two AD lines coming out of the stock market correction that started in mid-2011 and lasted into the first half of 2012. There again, the more traditional green AD line turned up first. In fact, the green AD line hit a new high at the start of 2012 (green circle), while the common stock only version (black line) didn't hit a new high until the early 2013 (black circle). The S&P 500 resumed its major uptrend two months after the green line in March 2009 (and ten months ahead of the black line). There's no guarantee that the more traditional version of the NYSE Advance-Decline line will be right this time again. But given its history at leading market upturns, I wouldn't be too quick to dismiss it. Chart 5 compares the two versions of the NYSE AD line in current time. You'll have to decide which one to trust.
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Chart 5
NYSE COMPOSITE INDEX STALLS AT NOVEMBER HIGH... Part of the reason why the "common stocks only" version of the NYAD line is lagging behind may be due to the action of the NYSE Composite Index (NYA) itself. The daily bars in Chart 6 show the NYA stalled at chart resistance along its November peak (black arrows). Part of the reason for its weaker performance may be its composition. The NYA is capitalization-weighted index that includes all stocks traded on the big board. However, foreign stocks account for more than third of its weighting. The weaker performance of foreign shares may help explain why the NYA has lagged behind the Dow and the S&P 500. From a charting standpoint, the NYA rally has stalled at a logical spot. So far, its pullback is relatively small and it remains above its moving average lines. Needless to say, an upside breakout through its fourth quarter high is needed to signal a bullish breakout, which would be good for it and the rest of the market. But it may need more help from foreign stocks to accomplish that. In the meantime, traders who look at charts (and most of them do) are taking some profits. They also remember that the "sell in May" rule worked pretty well last year. Even if the market doesn't suffer any major losses from here, seasonal and technical factors have encouraged a more cautious stance over the short run.
