A/D ratio is simply the ratio of the number stocks that are advancing in a particular day to the number of stocks that are declining in a particular day. While it may appear to be a very simple and plain vanilla measure, it can throw up interesting insights about the underlying strength of the market. Here are some key takeaways.

A shift in A/D ratio has normally been a strong lead indicator of the markets. Typically, the A/D ratio clearly shows a shift in favour of declines well before the actual correction in the stock begins. Similarly, the advances show clear uptrend well before an upturn in stocks and markets commences. Secondly, the A/D ratio is a strong indicator of the breadth of the market. It gives an indication of whether the market rally or fall is broad-based and therefore sustainable. Thirdly, sector specific rallies and downtrends can be evaluated on the strength of the A/D ratio to understand whether there is sector level re-rating happening or not.