Gavekal Capital: Breadth Is Deteriorating - Advance/Decline Ratio Hitting October 2008 Levels

Tuesday, July 22, 2014

Breadth Is Deteriorating - Advance/Decline Ratio Hitting October 2008 Levels

The Advance/Decline Ratio is a stock market breadth indicator that measures the number of stocks that end the day at a higher price versus the number of stocks that end the day at a lower price. It's a much more useful number when you apply a moving average to it since the day to day changes are very volatile. In all the charts below, we will use a 200-day moving average of the Advance/Decline Ratio (AD Ratio).

In a roaring bull market phase you would expect to see the number of stocks advancing far outnumbering the number of stocks declining. As the charts below indicate, we saw this happen from 2008-2012. The stock market advanced and the AD Ratio advanced right along with it. Since approximately the middle of 2012, we have seen the market continue to advance higher, however, the AD Ratio has steadily been declining. Note Asia-Pacific is a slight aberration since the AD Ratio had a very strong advance from June 2013-June 2014. The AD Ratio is, however, now falling in the Asia-Pacific region as well. The declines are most noticeable in The MSCI World Index and The MSCI North America Index. In fact, breadth is so poor in North America that we are back to levels last seen in October 2008.

About Gavekal Capital

Gavekal Capital is a US registered investment advisory firm that manages the Gavekal Knowledge Leaders Strategy. Knowledge Leaders are a group of the world’s leading innovators with deep reservoirs of intangible capital. These companies often possess competitive advantages such as strong brand, proprietary knowledge or a unique distribution mechanism. Knowledge Leaders are largely service-based and advanced manufacturing businesses, often operating globally. Gavekal Capital seeks to identify the world’s leading knowledge companies through a proprietary process that analyzes corporate knowledge investments.
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