It ain’t what you don’t know that gets you into trouble. It’s what you know for certain that just ain’t so. – Mark Twain
They say it’s bullish when advance decline lines lead markets to new highs. Well…yeah, but many well known rules of thumb can be very tricky. Case in point the S&P 500 in late 2015 and early 2016.
Here’s a look at both the S&P 500 (bottom) and the S&P 500 Advance-Decline line (top).
Clearly if you would’ve invested with confidence off of that chart alone, you have been buried in early 2016. So what are the lessons here?
- We know less than we think about markets
- Each data point is just a piece of evidence within the market mosaic.
- Keep a keen eye on what you think you know
Amazingly, this signal was never really invalid as the market continued to trade in line with the A-D line. If you could’ve survived the lows, you were made whole and then some as we all know what has happened since.
We just never know how markets will unfold.