Using Advance / Decline Data for ETF Investing

by: Gary Gordon

Advance/Decline advocates take issue with the media fascination with the big-time benchmarks like the S&P 500 and the Dow. "If you want to know what's really going on in the stock market," they argue, "then you really need to know whether a majority of stocks are climbing or falling."

Many investors are aware that the number of advancing stocks versus the number of declining stocks is readily available. It's published on every financial web site daily. It's also discussed on both television and radio. Yet how does one get a better ability to use this info in ETF investing?

First, one needs to get a percentage of the total number of "advancers" expressed as a percentage of the total number of stocks that a particular ETF tracks. So if the SPDR S&P 500 Trust (NYSEARCA:SPY) has 300 advancers with 200 decliners in a given day, the Advance/Decline Net % would be +20%. [(300-200) / (500) = .20 ]

Of course, one day does not a particular trend make. So the next concern is to use moving averages that show how the advancing stocks and declining stocks in ETFs perform over a period of time. A 60-day moving average of AD Net% is an approximation of 3 months (12 weeks) of trading activity.

For those who are interested in price breadth... for those wish to understand which ETFs may be turning the corner for real... a greater number of advancers over decliners over a sustained period may be valuable info. Here, then, are the top 5 and bottom 5 A/D Net Price % over 3 months.

Price Breadth of ETFs Using A/D Net % (60-Day Moving Average)
Best Net % Advancers
iShares Dow Jones Transportation (NYSEARCA:IYT) 7.2%
SPDR Select Energy (XLE) 5.9%
PowerShares Leisure Entertainment (NYSEARCA:PEJ) 3.2%
iShares Pharmaceuticals (NYSEARCA:IHE) 2.8%
PowerShares Water Resources (NYSEARCA:PHO) 2.4%
Worst Net % Decliners
SPDR Homebuilders (NYSEARCA:XHB) -6.1%
Semiconductor HLDRS (NYSEARCA:SMH) -6.9%
iShares Dow Jones Real Estate (NYSEARCA:IYR) -7.2%
Internet Infrastructure (NYSE:IIH) -7.3%
Nasdaq 100 Equal Weight (NASDAQ:QQEW)


Click to enlarge

Although I only published the top and bottom groups, there were a number of potential trends that stood out. First, both tech and broad financials came in on the negative side. That's potentially troublesome. A sustainable bull market rally needs the help of 2 of the largest segments, financials and technology.

Can we really get back on track with homebuilding still up in the air? If real estate and real estate finance continue to drop, aren't we still in the same boat? And if semiconductors historically lead the way towards economic expansion, will we be looking at a period sans growth?

A second observation is the recognition that, at least in more recent times, the "resources" bulls may be coming back. It could be argued, for instance, that the iShares Transportation Fund (IYT) is benefiting from reasonably priced fuel AND a potential resurgence in demand for the commodities that they ship. Energy (XLE) and Water Resources (PHO) are attracting investment.

One other area that didn't elude my notice, Pharmaceuticals (IHE). I provided a wealth of info in yesterday's editorial that supported the idea that the pharma sub-sector was on solid ground. With the A/D %Net data, I've uncovered even more evidence.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.