The S&P 500 surged above 5,200 to a then all-time high in late March, but has since showed signs that 2024’s unrelenting rally may have been too much, too fast. Are stocks taking a breather during April’s decline or has the market lost some of its momentum?
If you use charts to evaluate the market, this breadth indicator suggests stocks could continue to rally—but there is a potential warning sign.
How to use advance-decline
There are several variations of the advance-decline indicator, but all attempt to answer the same question: Are investors generally bullish or bearish?
It’s a sentiment indicator that looks at the number of advancing stocks vs. the number of declining stocks. Chart users can utilize this indicator to help confirm trends or signal potential reversals. The advance-decline line takes the cumulative total of the number of stocks advancing less the number of stocks declining over some period of time.
Here are the key points to know:
- If stocks or an index are rising and the A-D line is also rising, more stocks are contributing to the rally and sentiment is thought to be broadly bullish.
- If stocks or an index are falling and the A-D line is also falling, fewer stocks are advancing during the downtrend and investor sentiment is thought to be broadly bearish.
- If stocks or an index are rising but the A-D line is falling, fewer stocks are contributing to the rally and that could signal a potential reversal of the uptrend. If stocks or an index are falling but the A-D line is rising, fewer stocks are declining and that could signal a potential reversal of the downtrend. Both of these situations are known as divergences.
Basically, you look at the slope (or trend) of the advance-decline line and can compare it against the trend for stocks. Of course, these signals may not always confirm trends or forecast potential reversals. However, they are one of the primary ways that investors broadly assess investor sentiment.
Advance-decline stocks
The chart below shows how, for much of 2023, the S&P 500's advance-decline line was mostly flat—even though stocks were simultaneously climbing. But toward the end of last year and continuing through the first few months of 2024, the advance-decline line rapidly rose alongside the rally as stocks pushed to new all-time highs. This trend in the advance-decline line suggested market breadth was increasingly positive, which is viewed as a bullish signal.
However, the advance-decline line has declined notably in April (although it is still well above the most recent low in October 2023). This recent pattern could signal a potential reversal of the bullish trend if it continues. Chart users with short-term outlooks may want to monitor it in the coming weeks.
It’s also possible to look for divergences between an index’s value and the breadth indicator to signal a turning point. For example, if the S&P 500 made a higher high while the indicator made a lower high, this could suggest that the rally is weakening. Neither the S&P 500 nor its advance-decline line have made lower lows compared to recent patterns yet, which makes the case for the recent downturn in breadth to be a source of concern rather than a reversal signal.
Additionally, you can look at advancing stocks vs. declining stocks as a ratio. This is the number of advancing stocks divided by the number of declining stocks. Generally, you can look at trends in the ratio to see if investor sentiment is becoming more bullish or bearish over a period of time. It's worth noting that the timeframe you select can have a meaningful impact on the output of this indicator. You may want to tailor the time period to more closely match your investing or trading horizon.
Charting investing sentiment
Indicators like advance-decline can be useful to help form your overall investing outlook. While there are additional market breadth indicators, like the ARMS index (which incorporates volume), 52-week high/low, and others, advance-decline may be the most widely used of them.
A longer-term rise in the advance-decline line has been painting a mostly bullish picture, but active investors may want to monitor the recent trend for a potential shift in investor sentiment.