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Behind the Surging Indexes, a Case of 'Bad Breadth'

Stocks: The ratio of daily advancing issues to decliners is worsening. Some say it's a warning.


NEW YORK — So you say the Dow Jones industrial average was up 90 points Monday, but somehow your stocks all lost money?

Your portfolio may be suffering from what a technical analyst would call "bad breadth"--an increasingly common malady these days.

The problem is that since mid-spring, the market's gains have largely been concentrated in a handful of giant blue-chip stocks, leaving other stocks farther and farther behind.

Stock market breadth--the difference between the number of gaining issues and declining ones each day--has been steadily worsening, even as the Dow, the Standard & Poor's 500-stock index and the Nasdaq composite index all hit records within the last 10 days.

Monday was a perfect example. While the Dow climbed 1%, losing issues routed gainers 2,076 to 946 on the New York Stock Exchange.

Some technicians--analysts who use historical trading patterns to try to identify market trends--take the poor breadth as a sign of weakness that may signal a sharp correction--or worse.

Technicians consider a market healthy when a rise in the Dow and other indexes is "confirmed" by a rise in the cumulative advance/decline line, which simply charts the ratio of rising stocks to falling stocks day by day on the NYSE.

Bullish confirmation by the "A/D line," as technicians call it, has happened consistently during the current historic bull market. For at least the last three years, the advance/decline line has moved in virtual lock-step with the soaring S&P 500 index.

Until this spring, that is. On April 3, the advance/decline line soared to its highest point in years, a peak matched by the S&P 500, which also set a record that day.

But the A/D line then began to decline. The S&P also began to slide, but it reversed that trend in mid-June, when it began surging to its recent all-time high, reached July 17.

The A/D line, however, has mostly been in a sharp decline since the first week of May, and is far below its earlier heights.


In other words, individual stocks have racked up many more losing days than winning ones since then, regardless of what the popular market barometers may show.

If you plot the S&P 500 and the A/D line on the same chart, you see a "gap" that opened about May 4 and on Monday reached its widest point so far, with the S&P heading higher while the A/D line sinks.

The breadth situation is even worse in the Nasdaq market.

Gregory Nie, technical analyst at Everen Securities in Chicago, says the gap is evidence of "a much more selective rally, which raises questions about the sustainability" of the bull market. Nie added, however, that he remains bullish for the long term.

Less optimistic is Richard T. McCabe, chief market analyst for Merrill Lynch, who said that historically--in 1987 and 1990, most recently--such wide divergencies tended to end badly.

"What has usually happened is that the weak majority [of stocks] has dragged down the strong minority," McCabe said.

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