Five things you can infer from advance-decline ratio

One of the popular measures or ratios used to gauge the strength of the stock market is the Advance/Declines ratio or simply the A/D ratio. The A/D ratio is the ratio of the number of shares that advanced to the number of shares that declined. The extent of decline or rise in the stock price is not taken into consideration. On a particular trading day, if 1,300 stocks advanced, 1,100 stocks declined and 150 stocks were constant, then you can interpret the A/D ratio as 1300/1100 = 1.18. The table below captures the A/D ratio on a longer term basis month-wise. A/D ratio of above 1 is considered positive breadth while below 1 is considered to be negative breadth.

Monthly Data	Advances	Declines	Advances/Declines Ratio
Mar 2019	1,784	1,254	1.42
Feb 2019	1,399	1,491	0.94
Jan 2019	1,362	1,541	0.88
Dec 2018	1,493	1,402	1.06
Nov 2018	1,457	1,462	1.00
Oct 2018	1,455	1,495	0.97
Sep 2018	1,287	1,753	0.73
Aug 2018	1,586	1,463	1.08
Jul 2018	1,506	1,421	1.06
Jun 2018	1,314	1,631	0.81
May 2018	1,337	1,625	0.82
Apr 2018	1,637	1,349	1.21
Mar 2018	1,311	1,733	0.76
Feb 2018	1,468	1,628	0.90
Jan 2018	1,570	1,662	0.94
Dec 2017	1,695	1,361	1.25
Nov 2017	1,567	1,480	1.06
Oct 2017	1,641	1,376	1.19
Sep 2017	1,475	1,451	1.02
Aug 2017	1,387	1,526	0.91
Jul 2017	1,589	1,442	1.10
Jun 2017	1,505	1,506	1.00
May 2017	1,494	1,639	0.91
Apr 2017	1,762	1,480	1.19

Data Source: BSE

The month-wise table is very useful when you want to get the macro trend of the market over a longer term basis. You will normally find that as the market goes higher, the A/D ratio starts to wane. Normally, when the A/D ratio moves from positive to negative territory it is the first lead indicator of the market likely to correct. The reverse holds true when the A/D ratio moves from below 1 to above 1, it can be interpreted as a signal that the market may be giving a hint of a bounce back. One can get a clearer picture by comparing the A/D chart on a daily basis with the Nifty chart.

Get a more granular picture of advance-decline ratio

The month-wise picture of the A/D ratio may be a little too macro and you may want to look at the A/D ratio on a daily basis. In the table below, we have considered the A/D ratio of the BSE listed stocks for the first 15 days of March.

Days	Advance	Declines	Advance/Decline Ratio
01 Mar 2019	2,149	756	2.84
05 Mar 2019	2,430	679	3.58
06 Mar 2019	1,981	1,080	1.83
07 Mar 2019	1,558	1,432	1.09
08 Mar 2019	1,462	1,525	0.96
11 Mar 2019	2,063	988	2.09
12 Mar 2019	1,922	1,146	1.68
13 Mar 2019	1,330	1,754	0.76
14 Mar 2019	1,468	1,603	0.92
15 Mar 2019	1,486	1,582	0.94

Data Source: BSE

In the first few days of March, you can see a sharp rise in the A/D ratio touching as high as 3.58 and that set the base for the sharp rally in the Nifty and the Sensex. But as the Sensex and Nifty get closer to their all-time highs, you can see the tide clearly shifting in favour of declines. This can be a sign of caution and also indicative that valuation concerns are beginning to be built in at higher levels.

How to interpret the A/D ratio in the stock markets

As stated earlier, the A/D ratio has to be seen in the context of the trend over a period of time. That is why the daily A/D ratio has limited value but it is the short term and long term trend that matters. Here is how to interpret the A/D ratio.

• Look for sharp spikes in the A/D ratio or sharp falls in the A/D ratio. These are the most popular and well tested leading indicators of a rise or fall in the market.

• There is a short term trend in A/D and a long term trend in the A/D. The long term trend in A/D shows the secular trend in the market, while the short term trend shows the momentum. Quite often the short term A/D trend can be contrary to the long term trend. You need to tweak your trade accordingly.

• A/D ratio has to be ratified with the general trend in the Nifty or the Sensex. A shift in the A/D has limited interpretative value if the market does not move or shift direction in tandem with that.

• Larger the size of the sample, greater the credibility of the A/D ratio. No point doing A/D ratio analysis of Nifty or Sensex. You must compute the A/D ratio for a large population of minimum 1000 stocks to get an idea of whether the entire market is participating in the market movement or it is only a select list of stocks.

• Lastly, it needs to be remembered that A/D Ratio cannot be used as a standalone measure to interpret data. What you need to do is to ratify the A/D ratio with other data points like the (52-week high / 52-week low) and (Upper Circuit / Lower circuit) etc. That will give you a more reliable picture of the markets.

Disclaimer: The above opinion is that of Mr. Amar Singh (Head - Advisory - Angel Broking) & is for reference only.