Breadth May Be Breaking Down

One of the hallmarks of this entire rally has been the market's breadth. There's no denying how superb it has been. On many days, the S&P 500 has been flat to down or only moderately higher, and the breadth figures were still 2 to 1, favoring advancers.

Much has also been said about the advance/decline line and its uselessness. A stock once had to move 12.5 cents, or 1/8, to be either up or down. If it didn't move at least 1/8, it was unchanged on the day. The movement from fractions to decimals changed the nature of the A/D line. That may be one reason why the A/D line readings are often 2:1 or even 3:1 now, when that used to happen so rarely.

We also now have to contend with many non-common stocks trading on the New York Stock Exchange. So many preferreds, class A and class B shares, bond funds, real estate investment trusts and foreign stocks trade on the NYSE, which may skew the readings as well. Many longtime readers know that I keep an A/D line of only common stocks in order to eliminate that issue.

With all of that as background, I still think we can pay attention to the A/D line. Maybe we can't do so in the traditional sense of the statistic, but surely we can watch for changes taking place underneath. Last week was one of those times.

The bulls were thrilled with last Tuesday's huge A/D reading of +1,539 (advancers minus decliners). However, the ensuing three days were negative, wiping out that big gain and more. The S&P lost just over a buck last week, yet the cumulative A/D lost almost 700 issues. That is a change from what we've seen during the entire stretch of this rally. More typically, the S&P would lose a buck and the A/D would gain 700.

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Helene Meisler, based in Shanghai, writes a technical analysis column on the U.S. equity markets and updates her charts daily. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback and invites you to send it to [e-mail].