| BUSINESSWEEK ONLINE : JANUARY 17, 2000 ISSUE | ||||||||
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| NEWS: ANALYSIS & COMMENTARY
A Faulty Indicator, A Skewed Forecast? For more than a year, market mavens have been saying stocks can't keep going up because the advance is being supported by a narrowing list of equities. In large part, they base their argument on a widely used statistic: the New York Stock Exchange's advance-decline ratio. The A-D ratio is simply the number of issues that have risen in price compared with the number of issues suffering price declines during a particular trading session. Indeed, throughout last year, the advance-decline data consistently indicated that the number of stocks declining far exceeded the number of those advancing, even as the overall market rose. That prompted much anxiety on Wall Street where a weak or negative A-D ratio is regarded as a sure sign that the market is peaking. But the NYSE's A-D ratio may not be a reliable signal after all. To be sure, at the end of the year, it has fallen to its lowest level since 1995, with the number of NYSE stocks hitting new 52-week lows exceeding those at new highs by 10 to 1. But that's deceptive: The numbers include the 884 preferred stocks that account for almost 25% of total NYSE-listed issues. Preferred stocks don't act like common stocks; they're more like bonds because they pay regular, fixed dividends. So, as interest rates increased steadily through 1999, preferreds got hit. Take out preferreds, and the NYSE A-D line improves, showing far more advancing issues. The reverse is also true--when interest rates fall, preferreds rise. Case in point: on Jan. 4, when interest rates slumped, the Standard & Poors 500-stock index and Dow Jones industrial average dropped more than 3% and the Nasdaq some 6%. With the market so sharply down that day, one would have expected that the A-D ratio be top-heavy with losers. But lo and behold, declining NYSE issues outpaced advancing issues by only 2 to 1. The reason: Preferred stocks went up. In fact, on Jan. 4, using only common stocks, the ratio goes to 3-1. But there may be an even bigger debate raging over the NYSE A-D ratio. Some market technicians, such as Salomon Smith Barney's Louise Yamada, think that because the NYSE has a decreasing technology composition as well as a shrinking number of large-cap issues, it's A-D ratio is becoming less pertinent. ''As technicians, it's hard to throw away a tried-and-true indicator. But market leadership is shifting to the Nasdaq from the NYSE,'' she says. By Marcia Vickers in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS Rates Start to Bite TABLE: Will the Small- and Mid-Cap Revival Be Killed? CHART: High Interest Rates...Finally Hit the S&P 500...and Slam the Nasdaq A Faulty Indicator, A Skewed Forecast? INTERACT E-Mail to Business Week Online | |||
