Short-term Outlook:  Neutral  From Feb 26, 1107 SPX

Equity Indicators - Updates and Extremes

NYSE Advance/Decline Line

The third-most common form of analysis among technicians, second to price and volume (and their derivative indicators) is breadth; how many stocks rise and fall on a given day.

The granddaddy of all breadth measures is the cumulative advance decline line.  This simply takes each day's difference between the number of securities that rose versus fell that day, and adds it to a running total.  As long as that line continues to hit new highs along with the market, all is ostensibly well.

Here is a long-term chart for perspective, going back to 1940:

On a long-term time frame, I am not a big fan of using divergences between the a/d line and stocks as a timing indicator, because the divergence can play out over many months...or even years.  Note the running divergence between breadth and stocks from 1959 through 1973, and again 1998 through 2000.

History is chock-full of failed (or at least really, really, really delayed) divergences.

Yesterday we got a different kind of one, though.  The cumulative a/d line for the NYSE hit a new all-time high, but the S&P 500 remains more than 3% below even a one-year high.  Note that this divergence is unique to the NYSE a/d line - the one we track for the S&P 500 itself is still (just barely) below a new high.

That begs the question:  has that ever happened before, and if so, what did it mean?

So let's answer.  The table below shows the S&P 500's performance going forward after the a/d line reached at least a three-year high while the S&P was stuck at least 3% below a one-year high:

The results were pretty good.  Four of the thirteen were clustered in 1944, but other than that they were spread out, and generally it bode well for the stock market when breadth was doing so well.

By one month later, there was really only one meaningful loss of -3.3% in 1943.  Other than that, there was a minor loss of under -1% and one that was unchanged.  Looking out three months later, results were also generally impressive, with only two losses.

Like most of the intermediate-term studies we do, the sweet spot was 1-3 months forward.  Anything shorter or longer than that, and the results aren't quite as far from random as we should like.

Let's take one other look.  Now let's see how long it took the a/d line to hoist the S&P 500 up to a new one-year and three-year high, and the maximum loss it suffered getting there.

Frankly, this was surprising.  I would have thought it wouldn't take so long to reach a one-year high, but in about half the cases it took more than a month.  Part of the reason for that is a few times, stocks had a major decline, while breadth rebounded rapidly, so stocks had a lot of ground to make up.  But even if we restrict the divergences to those times when the S&P was only 3%-5% below its one-year high, the numbers didn't change that much.

The good news for bulls is that for the most part, the interim declines tended to be quite small.  Only three of them led to a drop of more than -3% before stocks recovered to a one-year or three-year high.  So while prices may drag out for a while before recovering, it was very rare to see the S&P simply collapse when breadth was so strong.

Combined with the long-term Consumer Confidence study we looked at yesterday, this seems like another good sign.