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I don't know precisely how the TC2000 is calculated, but it must be a broad a/d
line.
Except for very short periods of time, the NYSE A/D line was weaker than the
market in all periods I have followed it since the early 60's except for the
years 1976 and 1977. At that time I attributed the relative strength of the
A/D line to the DOW to the advent of indexing to the S&P 500. I figured that a
lot of money flow was being more widely distributed than previously. (I never
saw anyone else venture an opinion at the time.)
In all periods of my observation the Amex a/d line and later the Nasdaq a/d line
have been substantially weaker than the NYSE a/d line. My belief is that there
are different trading characteristics in the less liquid securities.. Charts of
individual stocks tend to corroborate my opinion. What I have seen is bursts of
price movement to the upside followed by numerous days of declining price action
that holds at higher price levels. With this trading pattern an
advance/decline line could decline while prices were actually rising. Given
this behavior it is useful to make regular reference to the Russell 2000 and or
the Value line to keep A/D line meaningfulness in perspective. The Value Line
and the Value Line geometric use two different calculations at trying to more
evenly weight stocks than the price weighting of the DOW or the capitalization
weighting of the S&P.
The theory is that at tops the troops stop following the generals. A
significant disparity suggests a lack of liquidity. The lack of liquidity
affects all stocks not just the smaller caps. As an indicator, from my point of
view the Russell2000, the Value Line, and the NYSE A/D line will all do the
job. The recent decline of the A/D line starts in the 2nd week of January.
That decline has been relatively non stop with slight improvement today. In
this same period, the DOW has gone side ways. The divergence is substantial and
the divergence is confirmed by the action of the 2000 and the ValueLine. The
action predicts for me a substantial decline to follow. The DOW could still hit
new highs, but it would not change the signal.
For investors and speculators the A/D has given a serious warning.
Stuart
BruceB wrote:
> -----Original Message-----
> From: HBernst963@xxxxxxx <HBernst963@xxxxxxx>
> Subject: Re: Re[2]: GEN: TC2000 A/D Line Revisited
>
> >Thanks for sending the chart. I see what you mean. How do you account for
> the
> >downward bias in this AD line? All the averages are well above their 1987
> lows
> >and this AD line continues to trend lower every year. What gives and how
> >useful can it be with such a bias?
>
> I think the AD line is slowly but surely becoming a useless indicator for
> finding market tops. I say this for three reasons, which can be seen by
> comparing the S&P to the Russell 2000 (R2K).
>
> 1. More and more people are finally seeing the light and realizing the vast
> majority of mutual fund managers can't even match the S&P (let alone surpass
> it...). They are therefore putting more of their investment dollars into
> S&P index funds. This causes two problems. A lot of people think the R2K
> is composed of the 2,000 largest companies, it isn't. It is actually
> comprised of the 2,000 next largest companies after the biggest 1,000 are
> removed. What this means is there is zero overlap between the R2k and the
> S&P. Therefore, any money going into S&P index funds is precluded from
> going into R2K stocks. Furthermore, the S&P is market cap weighted, which
> means the majority of money flowing into S&P index funds goes into just a
> handful of the biggest stocks. This just causes the big to get even bigger.
>
> 2. There is an inherent bias against the R2K. One of the darlings of the
> S&P over the last two years has been Cisco. Over those same two years Cisco
> has purchased 13 small but very promising companies, many of which were
> trading on the R2K at the time. It's entirely possible that all 13 of these
> companies would have appreciated significantly in value, and helped to carry
> the R2K index to new highs, but now we'll never know because they're now a
> part of Cisco. That's also 13 companies that would have helped to push the
> A/D line higher, but now can't. The point is, the "good" companies within
> the R2K get bought out, leaving more and more "bad" companies within the
> index. This bias has always existed, but it has certainly been greatly
> enhanced over the past 2 years, because large companies have been using
> their appreciated stock more and more to make acquisitions. Since this
> buying spree by the large caps shows no sign of slowing down, this negative
> bias against the R2K and the A/D line will continue.
>
> 3. In addition to the negative effect of the S&P index funds on the A/D
> line already mentioned, the actively managed funds are also making the
> problems worse. On the surface, you would think that the fact that so much
> money is going into the largest 500 companies through the index funds would
> give the managed funds a field day with smaller but promising companies, but
> it doesn't. Although the percentage of money going into index funds has
> gone up, in absolute terms the size of managed funds has gone up as well.
> The problem this has created is that there is simply no way a fund the size
> of Fidelity Magellan can take positions in small caps without getting killed
> on the slippage when both buying and selling the stock. Any advantage in
> buying these "undervalued" stocks would disappear on the transaction.
> There's simply too much money being moved in and out. This means even the
> managed funds have an inherent bias towards making the big bigger and the
> small smaller as well.
>
> I think the classic Dow theory analysis of transports vs industrials still
> carries some weight (because most of the transport stocks are pretty large).
> Since the transports have not made a new high while the industrials have, it
> does raise some concern. However, unless I'm doing my math wrong, the
> transports and the industrials have gone up almost the exact same amount in
> percentage terms since their October lows (the transports just dropped more
> in the first place). When you take that into account, the divergence
> doesn't look so dangerous.
>
> Bruce
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