ShmoopTube

00:00

Finance a la shmoop. What is the advance decline ratio? Alright people it's just a

00:09

percentage just like all its brethren or fellow ratios. Alright but what does that [Guy talking with his arms up]

00:13

percentage tell us what's that ratio all about? Well, basically looks at a given

00:18

index like the 500 stocks of the cleverly named S&P 500 or the 30 stocks [List of stocks]

00:24

of the Dow or the 1200 ish stocks of the Shmegeggie's small-cap index, yeah well then [Book of smallcap stocks]

00:31

just adds up which stocks went up that day like well last Tuesday 312 stocks in [Someone using a calculator]

00:37

the S&P 500 went up and 185 stocks went down and the rest just sat there not

00:42

moving, you know like this guy, a congressman, our finest, best and brightest. So why does this [Someone asleep in the audience]

00:47

advance decline number even matter? Like why do we track it, well what if we had

00:52

an index where technology stocks comprised like a third of the entire [Pie chart showing the large proportion of tech stocks]

00:56

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]

01:01

infected with Ebola. Yeah that's the same really, at least in Silicon Valley. All

01:05

right all right maybe you don't know that saying well it just means that

01:08

Apple is a really big market cap stock like knocking on the door of a trillion [Guy talking in front of an Apple store]

01:13

bucks, so it represents a huge percentage of the tech index. So when Apple stock

01:19

does poorly on a given day it tends to bring down all the other tech stocks in [Apple stock value going down]

01:24

its wake, why? Well because so many investors

01:27

assume that wherever Apple goes from an investor sentiment perspective that's [Guy answers the phone is shocked Apple is going down]

01:31

where all the other tech stocks will go as well Apple buys a gazillion

01:35

semiconductors and storage devices and stamping facilities so if it's business [Pictures of tech]

01:40

softens well then it's likely that the business of all the others in that tech

01:44

ecosystem who feed into it well they soften as well because Apple

01:48

is such a big customer in that space. So if Apple and tech dropped 20% in a given

01:54

day and all of tech goes down like a meaningful amount and that index is a [Down arrow on the stock index]

02:00

third tech well the rest of the market banks, transportation, mining, agriculture [Pictures of the industries]

02:05

etc well they might have had just a fine day they might have been up. But if tech

02:09

which is a third of that index is all down 20% on that one

02:13

day well the overall index would show that well the whole markets down an ugly [Guy showing the market price is down]

02:18

six plus percent and all you would have seen as an investor that the blah blah

02:22

blah 500 index fell from eight thousand seventy four hundred today, well you [Stock value chart going down]

02:27

might think the world was ending when in fact it was only the tech world that [A globe is shot]

02:31

ended that day, not everything else like banks might have had a great day, who [Grave stone for tech]

02:35

knows all the rest of the stocks that day might have gone up a little bit in

02:39

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]

02:43

was a third of them would have declined and you'd say that the advanced decline

02:48

ratio on that day was two to one. So if you were savvy you'd think it really odd

02:53

to have an advanced decline ratio at 200% i.e. well above one in a market that

02:59

was down a massive six percent that day something would not be adding up in your [Guy in a suit on the phone]

03:04

brain and you know to not just trust the index number you actually heard on the

03:08

news to reflect what actually happened with market conditions that day right so [Woman on the news showing stock price plummeting]

03:12

that's why you take a very hard look at the advanced decline ratio that's kind

03:17

of a delimiter or truing algorithm in all this.

Full Transcript