Advance-Decline Ratio: What does it tell us about market moods?

Anthony Fernandes
/ Categories: Knowledge
Advance-Decline Ratio: What does it tell us about market moods? 707 0

The advance-decline or ADR ratio is a popular market-breadth indicator that compares the number of stocks that closed higher against the number of stocks that ended lower compared to their previous market close price. It is calculated by dividing the number of advancing shares divided by the number of declining shares.  

The advance-decline ratio can be calculated for various periods, such as one day, one week or one month. Analysts and traders both like the measure as it's stated in a convenient ratio form; which is far easier than working with absolute values. 

How is ADR as a market indicator used? 

The ADR as a market indicator is used in two ways by analysts. First is by looking at the trend of ADR and comparing its moving average to the performance of a market index such as Sensex or Nifty. This helps to see if the minority of companies is driving the overall performance in the market or not. By looking at the ratio trend, analysts can determine whether the market is bullish or bearish.

The second way to use the ADR is by a standalone basis, where the ADR in itself can give perspective on the cause of an apparent rally or sell-off in the market. A high ADR ratio can indicate an overbought market, while a low ADR ratio can indicate an oversold market.  

For example, the advance-decline ratio (or ADR) hit a 17-month low in August 2021 and stood at 0.93 - largely on account of profit-taking in mid-and small-cap stocks. It was the lowest since March 2020 (0.72) – when the markets had corrected steeply as the pandemic forced the government to declare a nationwide lockdown. 

Since last month, the ADR ratio saw recovery and stands at 1.17 as of September 14, 2021.  

Month 

Advances 

Declines 

Advances/Declines Ratio 

September 2021 

1965 

1681 

1.17 

August 2021 

1755 

1888 

0.93 

July 2021 

2007 

1649 

1.22 

June 2021 

2036 

1609 

1.27 

May 2021 

2063 

1462 

1.41 

April 2021 

1892 

1496 

1.26 

March 2021 

1726 

1755 

0.98 

February 2021 

1837 

1596 

1.15 

January 2021 

1781 

1703 

1.05 

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