NYSE A-D Line Divergence

The SP500 on Jan. 23, 2025 was able to climb up to a new all-time closing high.  But it is not yet dragging along the rest of the market, and this may indicate a problem.

This week's chart shows a bearish divergence evident in the NYSE's cumulative Daily Advance-Decline Line.  The divergence is that the SP500 is making a higher high, but the NYSE A-D Line is not yet confirming.  The A-D Line is a cumulative running total of the daily difference between advancing and declining issues.  If more stocks are going up, then the A-D Line goes higher. 

Divergences like the current one can be really important, as we saw with the one which developed at the end of 2021, shown at the left end of the chart above.  But divergences can also get "rehabilitated" if the diverging indicator makes up the difference and goes higher.  That is possible.

One important point is that a divergence represents a "condition" and not a "signal".  Just because we notice a divergence does not mean that it has to matter right away.  When they do matter, it is on their own schedule. 

The reason why analysts pay so much attention to breadth indicators like the A-D Line is that most times they will do whatever prices do, but sometimes they give a different answer.  And that difference can be important.  Big-cap price indices like the SP500 are dominated by a handful of large issues, where as the A-D Line is more egalitarian.  Every issue gets an equal vote.

When liquidity starts to become a problem, it tends to affect the smaller and weaker issues first, before eventually coming around to bite the rest of the market.  So watching to see what all of the issues are doing as opposed to the currently fashionable large stocks can tell us about the health of the liquidity stream.  That is why the NYSE's A-D Line is one of my favorite indicators, to get that message about liquidity.

I recommend that people do not follow the Nasdaq's A-D Line, because it has an inherent negative bias.  It has never once made a new all-time high, and tends to drift lower because of the easier listing standards on the Nasdaq.  If a company is going to IPO then go broke, it is more likely to do that on the Nasdaq, and it will contribute to the Declines column every day it goes down from its IPO price to zero.  This makes the Nasdaq's A-D Line unreliable as an indicator, and it is currently close to making a new all-time low.  It does that a lot.

But the NYSE's A-D Line has worked well for decades, and it still appears to be working well.  Right now, it is giving us a bearish warning message.  The market is not necessarily obligated to comply with that message, and the bearish message could go away if breadth numbers suddenly start coming in stronger.  But for now it is a big warning of trouble.