Sector Advance/Decline Lines (8/22/08)

The 10-day advance/decline line measures the average daily number of advancers minus decliners in an index over the last 10 days.  This a/d line is a good measure of market breadth, and very strong readings to the upside or the downside are generally met with a reversal in the near term.  In general, bulls want to see a positive reading at all times, but they don't want it to get too overheated.

As shown below, the 10-day a/d line for the S&P 500 recently moved to the top of our red zone, which represents overbought territory.  After pulling back earlier this week, the a/d line for the market is still resting in positive territory.

click to enlarge

Advance/decline lines can be run on sectors as well, and below we provide historical charts of them for the ten S&P 500 sectors.  As shown, Technology, Health Care and Consumer Staples got extremely overheated heading into this week, and all were at their highest levels of the last year.  They moved back into neutral territory this week, It looks like they'll hold above break even for the time being.  And after moving into extreme oversold territory a week or two ago, breadth in the Energy sector has spiked in recent days.