Novice Traders' Notebook  |  NOV 2000

Nasdaq Advances — Declines by Dennis D. Peterson

Nasdaq Advances — Declines by Dennis D. Peterson This market breadth indicator remains one of the most popular ways to gauge market movement. Market indices can rise on the backs of just a few stocks. This is especially true with the Standard & Poor’s 500 and the Nasdaq Composite, since both are weighted by market capitalization. Market breadth indicators that can picture the entire market help traders and investors identify market momentum. The three measures typically used to characterize the New York Stock Exchange (NYSE), Nasdaq, and the American Stock Exchange (AMEX) are advances – declines, up/down volume, and new highs/new lows. Since many older textbooks do not mention the Nasdaq, let’s see what historical measures of breadth can do to help us understand Nasdaq momentum. One measure that has been used for a long time is the running total of advances minus declines. Figure 1 shows that for July 1999 through July 2000, there was a slow but steady erosion of breadth. Some flattening of the curve occurred with the small rally during June and July 2000, indicating that the Nasdaq rose on the backs of the equities with large market capitalization. This fit with analysts ’view that only the strongest companies would survive, pointing out that many Internet companies were struggling. The flattening indicated that breadth improved; that is, advances were equaling declines.

by Dennis D. Peterson