Breadth Indicators Show That Market Overall Is Sputtering

After its 116-point scamper Wednesday, the Dow Jones industrial average is a mere 0.4% from its record high last week. But don’t be fooled. The rest of the stock market isn’t doing nearly as well.

The blue-chip Dow index has notched seven record highs since April 3. But during that time, the broad market has sagged.

That’s shown by the so-called advance-decline line. The A-D line compares the number of stocks that rise in price each day with those that fall. If, on most days, more stocks advance than decline, the line slopes upward and the market’s “breadth” is said to be good. If decliners lead, breadth is weak and the line slips downward.

Since April 3, the New York Stock Exchange A-D line has dipped even as the Dow and Standard & Poor’s 500-stock index have climbed modestly higher, said Richard McCabe, chief market analyst at Merrill Lynch & Co. in New York.

In other words, ever fewer stocks are leading the market higher. Last week, for example, the Dow and the S&P; rose for the week, but the number of advancing stocks on the NYSE--1,330--was swamped by the 1,998 stocks that declined.

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Market pros call this a “divergence.” The better-known indexes are moving higher, but their action isn’t “confirmed” by similar advances in the overall market.

This scenario is worrisome because it suggests that most stocks have peaked, at least in the near term. Investors are cramming into the relative handful of issues that are still rising--in this case, major blue-chip names. If those stocks top out soon, and investors, for whatever reason, aren’t interested in buying the rest of the market, it could signal that a sharp pullback is in the offing.

Divergences of this type haven’t occurred much in the bull run of recent years. There was a similar circumstance in late February and early March of 1996, McCabe said, but breadth soon rebounded and the market overall moved higher.

Breadth could improve this time around as well. Even if it doesn’t, history has shown that the major indexes, on average, can rise for four to five months after the A-D line has hit its high for the cycle.

That might not be much comfort to investors in small and mid-size stocks, however.

McCabe isn’t ready to label this a market peak. “The market has gotten a little more ragged and narrowly based, but it’s too soon to conclude that it represents a sign of a major top,” he said.

One other breadth indicator is flashing a yellow light: The number of NYSE-listed issues reaching new 52-week highs hasn’t exceeded its July peak even as the Dow has pushed onward.

Last week, new highs on the NYSE totaled just 251, down from 644 the week ended April 3.

On an upbeat note, volume numbers look positive. Average daily NYSE volume hit a new high last month. Historically, the market hasn’t peaked for five to six months after volume has hit a high, McCabe said.

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Lower Highs

The number of New York Stock Exchange-listed shares hitting new 52-week highs has declined sharply in recent weeks.

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Week ended New highs April 3 644 April 10 437 April 17 506 April 24 415 May 1 202 May 8 262 May 15 251

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Source: Times research