Advance/Decline Quotes

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Examples of lowest A/D issues and A/D volume ratios
in 1999 and 2000 years

Between 1999 and 2000, only two instances of critically low Advance/Decline (A/D) issues and A/D volume ratios were recorded for the S&P 500 index (refer to Table 1 below).

Table 1. Lowest critical A/D volume and A/D issues ratios.
S&P 500 index. 1999 and 2000.

Date	Critical A/D Issues Ratio	Critical A/D Volume Ratio	Magnitude of Uptrend (Recovery Rally)	Chart and Point Reference
03/23/1999	0.08	0.06	23.0%	Chart #1 - A
04/14/2000	0.02	0.01	12.8%	Chart #2 - A
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Chart #1:   Lowest critical A/D volume and A/D issues ratios. S&P 500 index. 1999.
(In the bottom pane, Advance/Decline issues ratios are listed
at the top and Advance/Decline volume ratios at the bottom).

 

Chart #1 - Point A:

On this day, the S&P 500 dropped by almost 3%. This strong decline led to the critically low market sentiment readings seen at point A. Chart 3 (below) provides a two-year view of the action on the S&P 500 index - it places point A into a larger context. The two-year chart reflects how the critically low A/D volume and issues ratios served as a confirmation of an uptrend already in progress. The critically low market sentiment reached at point A gave further impetus to this uptrend, extending its run for another 20%.

 

Chart #2:  Lowest critical A/D volume and A/D issues ratios. S&P 500 index. 2000. (In the bottom pane, Advance/Decline issues ratios are listed at the top and Advance/Decline volume ratios at the bottom).

 

Chart #2 - Point A:

After a strong one-week decline that began on April 10 and ended on April 14, 2000, market sentiment reached extremely negative levels at point A. The S&P 500 index lost 11% in only 5 trading days. Immediately after reaching the critically low sentiment readings at point A, the index recovered with a rally of 8.5% over the next 3 trading days. Over the long-term, the market was overbought and thus ready to correct to the downside (chart 3 shows the market topping out shortly before reaching point B. This was at the height of the Internet bubble). Over the mid-term, the market was however oversold (look specifically at point B on chart 3) and therefore ready to reverse to the upside. Despite the fact that the market was overbought over the long-term, it proceeded to rally for some weeks, because it had reached extremely oversold levels at point B. The result was a mid-term upswing that took place around the time the market switched from a long-term uptrend to a long-term downtrend. After a brief correction from the mid-term oversold levels at point B, the market reverted back to its long-term overbought status, from which it corrected with a long-term downtrend.

 

Chart #3: Lowest critical A/D volume and A/D issues ratios. S&P 500 index. Two-year view: 1999 and 2000. (In the bottom pane, Advance/Decline issues ratios are listed at the top and Advance/Decline volume ratios at the bottom).

1999 was the last full year of the "Internet bubble". The bubble burst in 2000, with the DOW and NASDAQ Composite suffering their biggest single-day losses ever on April 14, 2000. The DOW shed 5.66% that day and the NASDAQ dropped 9.67%. The market then spun into a 3-year downtrend. It is interesting to note that over these two years, the A/D issues and A/D volume ratios reached critically low levels only twice (see points A and B on chart 3). The fact that only two mid-term oversold sentiment readings were registered over such a long time span is indicative of the overall positive market mood that prevailed throughout this time. This fact alone should have alerted professional analysts to the risk of a serious downside correction.

Over the last four months of 2000, the S&P 500 index lost almost 15%, yet this sharp decline did not lead to any extremely negative sentiment readings. This unusual occurrence can only be explained by a majority of traders still clinging to their bullish outlook, believing that the downturn was "just a small correction" and that the market would soon bounce back. It took seven months and a decline of almost 30% (from the end of August 2000 to the end of March 2001) to generate the first panic among traders (in March 2001).

We note:

1. Extremely low readings of our market sentiment indicators provide an excellent signal for a possible mid-term reversal to the upside;
2. An unusually low number of critically low Advance/Decline issues and Advance/Decline volume ratios over an extensive period of time may serve as an excellent indicator that the market is close to reversing from a long-term uptrend to a long-term downtrend.

Next: Advance/Decline in 2001

V. K.

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