It's yet another potentially meaningless index or metric that investors use to guage market sentiment. Like...if you found that there were a ton more puts out there then calls (i.e. investors being long the put or long the call), then it'd mean that market sentiment was bearish. If you own a put, you're betting the market is going down. And a call is...yeah, the opposite. So if there were an even number of puts and calls out there, then the market is probably...balanced.
The problem? The sentiment indicators don't really work. They sort of correlate over time with the data if you look in the rear view mirror in just the right way. But you're viewing them in a rear view mirror, meaning that things already happened. So it's hard to then make investing bets based on what the real-time data is giving you.
Our suggestion: crystal balls.
Related or Semi-related Video
Finance: What is the Advance Decline Rat...14 Views
Finance a la shmoop. What is the advance decline ratio? Alright people it's just a
percentage just like all its brethren or fellow ratios. Alright but what does that [Guy talking with his arms up]
percentage tell us what's that ratio all about? Well, basically looks at a given
index like the 500 stocks of the cleverly named S&P 500 or the 30 stocks [List of stocks]
of the Dow or the 1200 ish stocks of the Shmegeggie's small-cap index, yeah well then [Book of smallcap stocks]
just adds up which stocks went up that day like well last Tuesday 312 stocks in [Someone using a calculator]
the S&P 500 went up and 185 stocks went down and the rest just sat there not
moving, you know like this guy, a congressman, our finest, best and brightest. So why does this [Someone asleep in the audience]
advance decline number even matter? Like why do we track it, well what if we had
an index where technology stocks comprised like a third of the entire [Pie chart showing the large proportion of tech stocks]
index and you know the saying when Apple catches a cold the rest of tech is [Guy with an Apple briefcase for a head sneezes]
infected with Ebola. Yeah that's the same really, at least in Silicon Valley. All
right all right maybe you don't know that saying well it just means that
Apple is a really big market cap stock like knocking on the door of a trillion [Guy talking in front of an Apple store]
bucks, so it represents a huge percentage of the tech index. So when Apple stock
does poorly on a given day it tends to bring down all the other tech stocks in [Apple stock value going down]
its wake, why? Well because so many investors
assume that wherever Apple goes from an investor sentiment perspective that's [Guy answers the phone is shocked Apple is going down]
where all the other tech stocks will go as well Apple buys a gazillion
semiconductors and storage devices and stamping facilities so if it's business [Pictures of tech]
softens well then it's likely that the business of all the others in that tech
ecosystem who feed into it well they soften as well because Apple
is such a big customer in that space. So if Apple and tech dropped 20% in a given
day and all of tech goes down like a meaningful amount and that index is a [Down arrow on the stock index]
third tech well the rest of the market banks, transportation, mining, agriculture [Pictures of the industries]
etc well they might have had just a fine day they might have been up. But if tech
which is a third of that index is all down 20% on that one
day well the overall index would show that well the whole markets down an ugly [Guy showing the market price is down]
six plus percent and all you would have seen as an investor that the blah blah
blah 500 index fell from eight thousand seventy four hundred today, well you [Stock value chart going down]
might think the world was ending when in fact it was only the tech world that [A globe is shot]
ended that day, not everything else like banks might have had a great day, who [Grave stone for tech]
knows all the rest of the stocks that day might have gone up a little bit in
which case two-thirds of the stocks would have advanced and yeah, tech which [Arrow pointing to the other stocks which have increased in value]
was a third of them would have declined and you'd say that the advanced decline
ratio on that day was two to one. So if you were savvy you'd think it really odd
to have an advanced decline ratio at 200% i.e. well above one in a market that
was down a massive six percent that day something would not be adding up in your [Guy in a suit on the phone]
brain and you know to not just trust the index number you actually heard on the
news to reflect what actually happened with market conditions that day right so [Woman on the news showing stock price plummeting]
that's why you take a very hard look at the advanced decline ratio that's kind
of a delimiter or truing algorithm in all this.
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