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Advances Versus Declines

One of the indicators that investors use to gauge the health of the markets is the # of advances versus the # of declines.  This makes a lot of sense because it gives us an absolute number in terms of how many stocks have gone up, and how many have declined.  When looking at the Dow/Nasdaq/S&P500 indices, sometimes they are thrown off or skewed by several companies that have made major moves.  Although the Dow is used very often, it only represents 30 companies.  That is not really a good representation of the market.  That being said, the advances/declines ratio has its own limitations.  Investors can’t use it to determine how much the stocks have gone  up/down or how much the market went up/down.   For example, if there are 2 advances to have 1 decline, 2:1 ratio, one would not be able to interpret that the market went up by 1% today.

Here is a good place to start understanding how using the advance/decline indicators give you an idea of the “breadth” of the market. 

http://www.investopedia.com/university/marketbreadth/marketbreadth3.asp

Where do we find the number of advances and declines?  I personally using Yahoo Finance.  Starting from here:  http://finance.yahoo.com/advances  , you would click on “View more indices” on the left hand side and then on the left hand side in the Market Stats, click on “Advances & Declines”, you’ll see something like this:

Or you can also just click on this:  http://finance.yahoo.com/advances

I started to wonder whether using the # of  upgrades versus downgrades or the # of analysts raising price targets versus the # of analysts lowering price targets provides similar information.   That answers is absolutely NO.  Each day I look at all the price changes and upgrades and there are an overwhelming large number of stocks being raised/upgraded compared to stocks being lowered/downgraded despite whether the market has gone up or down for the day.   Based on what I have been seeing, the analysts are overwhelmingly positive.  This may tell me that we’re in for some new highs in 2010 or it could also be a untrustworthy indicator.   With all this positive sentiment, you can’t help but think that investors must be pouring all their money back into the market and at the very least the individual stocks should be getting a temporary pop for the day.  However, the market overall has still been a bit of a rollercoaster, it hasn’t been just going up non-stop.  Fortunately, there have been more Ups than Downs in the last couple of months but there have definitely been days where the market has barely moved or has moved down and yet these analysts are still overwhelmingly positive for the stocks that they cover.  Therein might lie the problem.  The coverage of the stocks generally are for the well-known companies or companies with potential to make some money from.  Why would an analyst cover stocks that never move and never will?  To be fair, I’d only want to look at a company that I might be able to make some money in too.  If there was daily unbiased coverage for every company or at least a good representation of companies, then we could use analyst sentiment to decide on the health of the market.

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