As the market gasps for breath this morning in a major selloff for stocks, we're looking at the breadth for more indications on the downward pressure.
A sea of red continues to flow. The Dow Jones Industrial Average dropped almost 2% in early trading. The S&P 500 sank about 3%. DuPont (DD) led the losses on the Dow early on then recovered slightly, down recently about 5%; Coca-Cola (KO) and Visa (V) followed, also down about 3%. In the S&P, Freeport-McMoRan (FCX) fell by more than 4%, Dow Chemical (DOW) fell 3% and Netflix (NFLX) fell 3%.
The Wall Street Journal ran a story today C1, below the fold, on the number of stocks below the 200-day moving average.
This is an OK technical tool to show the breadth of the market but the Cumulative Advance Decline (AD) has a longer history of leading at major market turns/tops.
This longer history dates back to the 1920s and shows us just what market breadth is.
In the 1920s, an analyst by the name of Leonard Ayres ran a company called Standard Statistics (which later merged into Poor's and Company and Standard and Poor's is, of course, still around today) and collected all kinds of data -- coal production, pig iron prices, movement of goods on Erie Canal -- and the number of securities that rose and fell on the stock exchange.
Ayres found that better economic periods and stronger stock market advances happened when more stocks rose than fell (market breadth). Technicians would on a daily basis take a cumulative running total of the number of advancing stocks less the number of declining stocks. Market technicians found that peaks in the A/D line have preceded market peaks by four to six months.
In the above chart from Bloomberg, the arrow shows the most recent peak (mid-April) in the A/D line (just stocks listed on the NYSE). For context, the A/D line peaked in June 2007 before the October 2007 peak in the market and the subsequent 2008/09 decline. If history is repeating itself, we are right on schedule with this selloff in late August, about four months after the most recent peak.
-- By Bruce Kamich and Sebastian Silva