What The New High In The Advance-Decline Line Means For Stocks

Summary: The cumulative advance-decline (A-D) line for both the NYSE and SPX made a new all-time high (ATH) last week. That's good news for stocks, as they most often move higher in the following weeks/months, also to new highs.

This is probably the best way to use the A-D line in equity research. Other common uses of A-D line are fraught with issues.

For example, while it's true that the A-D line has often weakened before stocks have encountered a major decline, you'll need hindsight to make use of this information. For every time a weakening A-D line has signaled a major fall it has signaled nothing special at least twice as often. "Negative divergences" happen all the time. In real-time, it is impossible to know when a divergence is worth paying attention to.

Last week, the cumulative advance-decline (A-D) line for both the NYSE and SPX made a new all-time high (ATH). The A-D line sums the net number of stocks moving up on the day added to yesterday's total. The idea is that when the A-D line is rising, more stocks are moving higher and breadth is considered healthy. In other words, it's a bullish sign for stocks.

Let's start with the good news.

The charts below show every "breakout" in the NYSE A-D line to a new high (top panel) and what happened next to SPX (lower panel) in the past 30 years. What we find is that in every case, SPX has moved higher in the weeks/months ahead. Enlarge any chart by clicking on it.





The not so good news is that the gains haven't always been right away. In the chart above, note how SPX went nowhere for several months in 2016. That was also the case in 1993 and 1996, for example.