Advance Decline issues volume ratio support level

Between 1999 and 2000, only two instances of critically low A/D issues and A/D volume ratios were recorded for the S&P 500 index (refer to Table 1 below).

Table 1. Lowest critical A/D volume and A/D issues ratios. S&P 500 index. 1999 and 2000.

Date	Critical A/D Issues Ratio	Critical A/D Volume Ratio	Magnitude of Uptrend (Recovery Rally)	Chart and Point Reference

03/23/1999	0.08	0.06	23.0%	Chart #1 - A
04/14/2000	0.02	0.01	12.8%	Chart #2 - A

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Chart #1: Lowest critical A/D volume and A/D issues ratios. S&P 500 index. 1999. (In the bottom pane, A/D issues ratios are listed at the top and A/D volume ratios at the bottom).

Chart #1 - Point A:

On this day, the S&P 500 dropped by almost 3%. This strong decline led to the critically low market sentiment readings seen at point A. Chart 3 (below) provides a two-year view of the action on the S&P 500 index – it places point A into a larger context. The two-year chart reflects how the critically low A/D volume and issues ratios served as a confirmation of an uptrend already in progress. The critically low market sentiment reached at point A gave further impetus to this uptrend, extending its run for another 20%.

Chart #2: Lowest critical A/D volume and A/D issues ratios. S&P 500 index. 2000. (In the bottom pane, A/D issues ratios are listed at the top and A/D volume ratios at the bottom).

Chart #2 - Point A:

After a strong one-week decline that began on April 10 and ended on April 14, 2000, market sentiment reached extremely negative levels at point A. The S&P 500 index lost 11% in only 5 trading days. Immediately after reaching the critically low sentiment readings at point A, the index recovered with a rally of 8.5% over the next 3 trading days.

Over the long-term, the market was overbought and thus ready to correct to the downside (chart 3 shows the market topping out shortly before reaching point B. This was at the height of the Internet bubble). Over the mid-term, the market was however oversold (look specifically at point B on chart 3) and therefore ready to reverse to the upside.

Despite the fact that the market was overbought over the long-term, it proceeded to rally for some weeks, because it had reached extremely oversold levels at point B. The result was a mid-term upswing that took place around the time the market switched from a long-term uptrend to a long-term downtrend. After a brief correction from the mid-term oversold levels at point B, the market reverted back to its long-term overbought status, from which it corrected with a long-term downtrend.

Chart #3: Lowest critical A/D volume and A/D issues ratios. S&P 500 index. Two-year view: 1999 and 2000. (In the bottom pane, A/D issues ratios are listed at the top and A/D volume ratios at the bottom).

1999 was the last full year of the "Internet bubble". The bubble burst in 2000, with the DOW and NASDAQ Composite suffering their biggest single-day losses ever on April 14, 2000. The DOW shed 5.66% that day and the NASDAQ dropped 9.67%. The market then spun into a 3-year downtrend. It is interesting to note that over these two years, the A/D issues and A/D volume ratios reached critically low levels only twice (see points A and B on chart 3). The fact that only two mid-term oversold sentiment readings were registered over such a long time span is indicative of the overall positive market mood that prevailed throughout this time. This fact alone should have alerted professional analysts to the risk of a serious downside correction.

Over the last four months of 2000, the S&P 500 index lost almost 15%, yet this sharp decline did not lead to any extremely negative sentiment readings. This unusual occurrence can only be explained by a majority of traders still clinging to their bullish outlook, believing that the downturn was "just a small correction” and that the market would soon bounce back. It took seven months and a decline of almost 30% (from the end of August 2000 to the end of March 2001) to generate the first panic among traders (in March 2001).

We note:

1. Extremely low readings of our market sentiment indicators provide an excellent signal for a possible mid-term reversal to the upside;

2. An unusually low number of critically low A/D issues and A/D volume ratios over an extensive period of time may serve as an excellent indicator that the market is close to reversing from a long-term uptrend to a long-term downtrend.