Advance-Decline Ratio vs. NSE/Nifty
To gauge the strength of a bull market, investors typically look at the Advance/Decline ratio. If the A/D is high or increasing during a bull run, it indicates broad participation across all stocks. On the other hand, if the A/D line heads lower while the market is moving up, it indicates that only a few (large market cap) stocks are driving the indices higher. Such poor breadth cannot be sustained and the overall market will eventually follow the A/D line lower.
I compiled data from the National Stock Exchange (NSE) website for the 2000-2005 period; specifically the Advance/Decline data, CNX Nifty-50 Index and total NSE Market Capitalization. Note that I used a polynomial trendline to smooth out the fluctuations in the A/D data.
Source: NSE
The above chart shows an increase in the A/D ratio from 0.8 to 1.0, along with the rise in the Nifty-50 index. There was a decline in mid-2005 but the ratio is again heading north.
Source: NSE
The second chart is similar, except that it shows the total market capitalization of all stocks traded on the NSE.
Source: NSE
This one’s got nothing to do with A/D, but is quite interesting. I normalized the Nifty-50 index & the NSE market cap at 100 in April 2000. While the Nifty-50 went from 100 to 150 in November ‘05, the total NSE market cap rose from 100 to over 250! This shows very good breadth, i.e. it’s not just the 50 stocks within the Nifty-50 index that have gone up. In fact, its the other (small/mid cap) stocks that have performed better since mid-2004.
Source: NSE
And finally, I plotted the Advance/Decline ratio versus the “Advanced minus Declines“, to check for conflicting signals. It seems the two metrics stayed in tune with each other throughout the 2000-2005 period.
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