As the Nasdaq Composite has surged higher in 2023 and 2024, the Nasdaq Advance Decline Line is currently at its lowest level since 2009.
The advance/decline line or ADL is a breadth indicator that sums the advancing stocks minus the declining stocks each day.
The extremely low ADL reading on the Nasdaq Comp. has received some publicity, as it has radically diverged with surging stock prices over the last year and a half.
While the price rally will run out of steam at some point, as all bull markets eventually come to end, the Nasdaq advance/decline line is not a good determinant of market health, says Cory Mitchell, an analyst with Tradequotex.com.
Mitchell said, “A better indicator of market health is the NYSE ADL. The NYSE has more stringent requirements for a stock to be listed on its exchange.
“The Nasdaq is filled with start-up companies that often never reach profitability and end up delisted. When these companies are dropped from the Nasdaq Composite index, the declining stock price no longer harms the index, but its drag on the advance/decline remains.
“This is why the Nasdaq ADL can fall even as the indices soar. It is not a good measure of market health, and should not be used to assess whether the Nasdaq indices are likely to rise or fall.”
The following chart from MarketInOut shows the Nasdaq Composite along with the Advance/Decline Line. The ADL started falling in late 2021 and has been falling since, even though the index is up nearly 80% in that time. This tells us that many stocks didn’t do well and were delisted, even while stocks that remain have done well on average.
If looking to assess the health of the Nasdaq Composite (which includes all Nasdaq stocks) or the Nasdaq 100 (the largest 100 companies listed on the Nasdaq exchange), there are better indicators for doing so.
- The Nasdaq 100 Advance Decline Line. The Nasdaq 100 AD line tends to move with price better because these large companies are less likely to be delisted and/or are more established than many of the smaller companies included in the Nasdaq Composite.As the Nasdaq 100 rises, so should the Nasdaq 100 ADL. If the ADL is falling, that could signal underlying weakness and prices could soon fall. If the index is falling and the ADL is rising, that signals underlying strength and the index could rise.
Percentage of stocks above their 50-day moving averages. If the indices are moving higher, most stocks should be in short-term uptrends. A 50-day moving average is a crude measure of whether a stock is in an uptrend or not. If more than 50% of stocks are above the 50-day moving averages as indices rise, that is generally a good thing.
If indices are rising but the percentage of stocks above their 50-day moving averages declines below 50%, that could indicate that many stocks are not participating in the rally and it may be nearing an end. If the index is falling but the percentage of stocks above the 50-day rising, especially above 50%, signals underlying strength and the index could soon rebound
