Finance: What is the Advance Decline Ratio?

What is the Advance Decline Ratio? The advance decline ratio is used to determine how the market performed on a given day. It does this by comparing how many stocks closed above the previous day’s closing price to how many closed below the previous day’s closing price. If the ratio is really high, it is possible that investors are overly confident in the market and are overbuying. Conversely, if the ratio is really low, investors are probably not so confident and are overselling.

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Transcript

00:31

just adds up which stocks went up that day like well last Tuesday 312 stocks in [Someone using a calculator]

00:37

the S&P 500 went up and 185 stocks went down and the rest just sat there not

00:42

moving, you know like this guy, a congressman, our finest, best and brightest. So why does this [Someone asleep in the audience]

00:47

advance decline number even matter? Like why do we track it, well what if we had

00:52

an index where technology stocks comprised like a third of the entire [Pie chart showing the large proportion of tech stocks]

00:56

index and you know the saying when Apple catches a cold the rest of tech is [Guy with an Apple briefcase for a head sneezes]

01:01

infected with Ebola. Yeah that's the same really, at least in Silicon Valley. All

01:05

right all right maybe you don't know that saying well it just means that

01:08

Apple is a really big market cap stock like knocking on the door of a trillion [Guy talking in front of an Apple store]

01:13

bucks, so it represents a huge percentage of the tech index. So when Apple stock

01:19

does poorly on a given day it tends to bring down all the other tech stocks in [Apple stock value going down]

01:24

its wake, why? Well because so many investors

01:27

assume that wherever Apple goes from an investor sentiment perspective that's [Guy answers the phone is shocked Apple is going down]

01:31

where all the other tech stocks will go as well Apple buys a gazillion

01:35

semiconductors and storage devices and stamping facilities so if it's business [Pictures of tech]

01:40

softens well then it's likely that the business of all the others in that tech

01:44

ecosystem who feed into it well they soften as well because Apple

01:48

is such a big customer in that space. So if Apple and tech dropped 20% in a given

01:54

day and all of tech goes down like a meaningful amount and that index is a [Down arrow on the stock index]

02:00

third tech well the rest of the market banks, transportation, mining, agriculture [Pictures of the industries]

02:05

etc well they might have had just a fine day they might have been up. But if tech

02:09

which is a third of that index is all down 20% on that one

02:13

day well the overall index would show that well the whole markets down an ugly [Guy showing the market price is down]

02:18

six plus percent and all you would have seen as an investor that the blah blah

02:22

blah 500 index fell from eight thousand seventy four hundred today, well you [Stock value chart going down]

02:27

might think the world was ending when in fact it was only the tech world that [A globe is shot]

02:31

ended that day, not everything else like banks might have had a great day, who [Grave stone for tech]

02:35

knows all the rest of the stocks that day might have gone up a little bit in

02:39

which case two-thirds of the stocks would have advanced and yeah, tech which [Arrow pointing to the other stocks which have increased in value]

02:43

was a third of them would have declined and you'd say that the advanced decline

02:48

ratio on that day was two to one. So if you were savvy you'd think it really odd

02:53

to have an advanced decline ratio at 200% i.e. well above one in a market that

02:59

was down a massive six percent that day something would not be adding up in your [Guy in a suit on the phone]

03:04

brain and you know to not just trust the index number you actually heard on the

03:08

news to reflect what actually happened with market conditions that day right so [Woman on the news showing stock price plummeting]

03:12

that's why you take a very hard look at the advanced decline ratio that's kind

03:17

of a delimiter or truing algorithm in all this.