liberatedstocktrader

AD Ratio Suggests Birth of a New Bull Market!

SPCFD:SPX   S&P 500 Index
AD Ratio Suggests Birth of a New Bull Market!
Or the madness of crowds.

The Advance-Decline Ratio (ADR) is a simple measure of how many stocks increase versus how many decline. A ratio of 1 means 1 company’s stock increases to every 1 that declines. A ratio of 4 means 4 increase to every 1 that declines.

It is a good measure of the bullishness of the market participants. The magic number I am using for this analysis is an ADR of 4, as anything above 4 increases to 1 typically indicates a turning point in the market.

Chart Setup:
Price – Log Weekly
AD Ratio – 10 Bar Moving Average + 200 Bar Moving Average
AD Ratio Red Line = 4 Indicating Extreme Bullishness

There are two stories here. You need to decide which one you believe.

Pre 2008 Crash – The Madness of Crowds.

During the Financial Crisis crash from 2007 to 2009 the crowds were simply wrong. Extreme ADR indicated only temporary market bottoms, which were followed by brief rallies then market collapse.

Post 2009 – The Birth of Bull Markets.

Since 2009 the market participants signaled extreme positive sentiment with an AD ratio above 4 on 9 separate occasions which all indicated the end of the bear market and birth of a new bull market.

This suggests one of two things:
1. During a major market crash the crowds are overly optimistic, underestimating the full impact of the economic devastation.
2. During a long-term bull market, the crowds are correct, in fact, it is the crowds of course, who power the bull market.

The Key Point.
The Corona Crash has shown us 2 extreme bursts of ADR buying above 7 for the week’s March 9 and April 6.
This means either the birth of a new bull market or the radical underestimation of the impact of Corona on the economy.
Final Summary.
I am not convinced either way.
Part of me thinks that this is the start of the new bull market, because in fact governments have done everything possible to stimulate the economy and save jobs and industry, there is no other choice apart from instant economic devastation. Interest rates will remain close to zero for the next 10 years and in governments stimulate inflation that the debt will eventually reduce by itself (according to the Economist April 24th Edition)
The other part of me thinks that we simply cannot move to a new market high without further market correction to account for the large losses in future earnings .

Do not forget.
This market is driven now by central banks, Trump and Macro-economics. This market will turn on its head with a few massive headlines.

Let’s have a discussion, let me know your thoughts below, I will try to reply to all.

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Stay healthy.
Barry

Comments

I believe this is biggest economic crisis since 1929 , my analyse suggest spx should see 1400-1700 area in the next few weeks
+3 Reply
MystryBox Fallen_trader
@Fallen_trader, oil price agrees with you.
+3 Reply
I totally agree that there are a million reasons this market should fall off a cliff but every single time I try to fight the FED, I pay big-time:( So, I tend to agree with your analysis.
+1 Reply
@liberatedstocktrader This idea was featured in the TradingView Weekly Digest. Thanks for sharing your work on the Advance-Decline Ratio (ADR).
+1 Reply
@TradingView, Wow, great thanks for that. ;)
+1 Reply
Thx Barry! In my opinion we will see a longer down cycle. the economy was infected with a virus long before the covid 19. Now we see the beginning results. It's like the virus is now going around in the economy. normally we had 4 to 6 years going up, thereafter we had a correction and the ill/incompetent companies became bankrupt. now, since 11 years we had no such correction....its like a over-doped market driven by central banks and politics. i think we will see a downmarket for at least 1-2 years -this would be normal - in the real world i see that for this year all expenses in the tourism sector is halted 50-70% in construction-sector is halted - and this will influence future investments and so on and so on. In the last crisis we had only one sector with big problems but this time we have nearly all of them - remember Lehman, madoff, general motors, WAMU,.... this time luckin coffee?? No, we are in the beginning of the crash - corona is not the crash its the trigger. I have seen since 1996 a lot of bubbles but never a "allthogetherbubble".

Don't forget the following Next steps in the coming years:
1. crises (civil wars, currency or politics) in "second world" countries like Brazil, southafrica, Venezuela, Vietnam, Bangladesh and "great" britan (India maybe)...this will influence our economies too
2. sovereign debt crisis: US and Europe + England.....this will influence our economy too ;)
3. housing bubbles in Canada, Germany, Austria, Australia, China+-, New Zealand, Sweden, Norway (This time not the US, but a correction will take place too)
+1 Reply
@foaraman, good points
Reply
Very nice evaluation. I personally think it's too soon to see the bottom. Why? Because this crisis broke almost all the records in the stock market history. It's too optimistic to believe we go out of this worst disaster ever by a V shape recovery. Beside the corona virus which still is here and will come back very soon on fall we face another risk which is on the oil market. The entire petroleum industry is about to shutdown. If this happens then oil companies will bankrupt, then financial institutes who loan them, then the domino will start again. In order to prevent another market crash we need to see actual data not only good news from the press. We need the vaccine come to the market before fall. We need increase in oil demand. We need the economy start in full capacity. Without this parameters I don't see in hope for major recovery. :)
+1 Reply
@hesamqaydi, fair point. We are certainly witnessing history.
+1 Reply
Great Analysis. I am new to technical analysis. I noticed a lot of idea's out there uses various indicators for their own analysis. I was just wondering what was the approach when you first started with technicals and what is your current approach in terms of learning new indicators, collaborating with what you already know and correlating data to make an analysis such as the one you've posted. Im striving to learn from experience users and trying to get a few pointers. :-) thank you in advance. Thanks for sharing your thoughts.
Reply
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