A New All-Time High In The NYSE A/D Line Is Bullish Until It Isn't

• Superior Breadth Over Price Does Not Always Have a Positive Outcome
• Weighted versus Equal Weight

Chart 1 shows that the NYSE A/D Line touched a new high last week and seems to be leading the S&P higher. The textbooks tell us that a broad advance, such as that underscored by a rising A/D Line, is bullish because it reflects two positive factors. First, since many issues such as preferred shares are interest sensitive, a rising line implies falling interest rates and an accommodative monetary stance. That’s not inconsistent with the Fed recently changing policy slightly by putting the trend of rate hikes on pause. The second reason why broad participation is considered positive is because it implies that the economic recovery itself is also firing on all sectors, thereby making it a healthy one.

In the past, many stock market tops have been associated with A/D Lines that peaked ahead of the S&P Composite. This kind of action reflects a narrowing recovery and/or a background of rising rates, neither of which is exactly positive for equities. If narrowing breadth is negative, strong breadth should be positive right? Yes, as a general rule I agree with that statement, but that has not always been the case, which means that improving breadth is  not a guarantee that things won’t fall apart.

Chart 1

Superior Breadth Over Price Does Not Always Have a Positive Outcome

Let’s take a closer look at Chart 1, in which the blue arrows point out that both series experienced positive trends from February 2018 onwards. Indeed, the A/D Line touched a new high in early May and, from there, proceeded to lead the $SPX higher until the fall. However, these in-gear characteristics did not prevent the S&P from experiencing an 18% decline into the Christmas period. Now, we appear to be seeing a similar setup, with a new breadth high and a lagging S&P. Does this mean a higher market or something more similar to the September/December price action?

Historically there are very few instances of daily NYSE breadth leading prices higher akin to what’s happening now. It seems the best way to untangle this breadth/price dichotomy is to try and identify joint trend reversals in the A/D Line and $SPX in a similar approach to the way in which we treat other kinds of divergences. Chart 2 attempts to do this by constructing trend lines for both series and observing their violation. In this way, several useful signals have been flagged. In addition, it’s worth noting that a small negative divergence started to develop in late August 2018, which has been flagged by the two red dashed lines. It is evident that the A/D Line, which had been leading the market higher, peaked ahead of the $SPX. A subtle change, but an important one.

Chart 2

Charts 3 and 4 show the same setup, but this time for the NYSE and the advance decline line. In Chart 3, the NYSE reached its peak in January 2018, touched a lower one in September and closed even lower last week. This is despite the fact that the A/D Line has, since January 2018, traced out two consecutive higher highs.

Chart 3

Note that the same negative divergence that developed at last year’s high for the $SPX was also apparent for the NYA. Chart 4 also features joint trend line breaks that would have been helpful in identifying trend reversals. A couple of trend lines have been constructed for the 2019 rally but, with them both being steep and short, their violation will most probably not have as much significance as the other violations. At the moment, both lines are intact and both series registered joint highs last week. As long as that state of affairs lasts, it’s best to assume that the intermediate uptrend is intact and that improving breadth is a positive factor.

Chart 4

Weighted versus Equal Weight

Changes in market leadership often develop at major stock market lows, such as that seen in December. One leadership characteristic of the subsequent 2019 rally has been the strong relative performance of the equal-weighted S&P, which is featured in Chart 5 along with its long-term KST. The ratio has just broken above its 2016-19 downtrend line and 12-month MA. The long-term KST is still bearish, but has nevertheless started to hook to the upside, favoring the equal weighted index. The bottom line is that it looks as though the equal weighted index has begun a long-term trend of superior relative performance and is now a market leader.

Chart 5

Strong relative action does not guarantee that the absolute price will move higher, though usually that’s the case except during the most severe of bear markets. Chart 6 shows that the price of the Invesco S&P 500 Equal Weight ETF (RSP) is comfortably above its 200-day MA and two recent highs. However, in order to qualify as a positive long-term technical situation, it needs to trace out a series of rising peaks and troughs and reverse the negative long-term KST trend. An objective rating of the absolute price trend comes in as mixed.

Chart 6

The same sort of comments relating to a positive relative and neutral absolute price trend can be addressed to three equal-weighted sector ETFs. For instance, the Invesco Equal Weighted Health Care ETF, the RYH, has completed and broken out from a multi-year base and its long-KST for relative action is positive. The absolute price may be above its 65-week EMA, but this is offset by a series of declining peaks and troughs, as well as a negative long-term KST.

Chart 7

Consumer Staples, in Chart 8, looks positive from a relative aspect. A clear-cut signal from the absolute price would come with a break above the green resistance line at $130. Note that the absolute KST for the RHS is also very close to a positive signal.

Chart 8

Finally, Chart 9 compares the Invesco Equal Weight Technology (RYT) to the NASDAQ 100. This is a monthly plot taking us  back to 2004. In the last month, the RS action has pushed the ratio above the two converging trend lines. This breakout from a multi-year trading range suggests that the trend in equal weight superior performance is in its infancy.

Chart 9

The absolute price in Chart 10 looks to be in a similar technical position as the other equal weighted ETF’s, with the difference being that it has just completed what looks to be a very bullish broadening formation with a flat top (alternatively known as a right angled broadening formation). These patterns, like others, do not always “work,” but, when they do, they typically provide more bang for the buck than other formations of similar size and depth.

Chart 10

Good luck and good charting
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.