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Advancing and declining

Ask the Fool

Published: January 24, 2023

Q. What's the "advance-decline" ratio? -- G.K., Decatur, Illinois
A. It's an indicator that some people use to gauge market sentiment. It simply takes the total number of stocks that are trading above where they last closed and divides that by the total number of stocks trading below where they last closed.
There are close to 6,400 stocks on the New York Stock Exchange and the Nasdaq Composite combined. If 4,000 of them are trading higher than their last closing price while 2,400 are trading at a lower level, the advance-decline ("A/D") ratio would be 4,000/2,400, or 1.67. A number above 1.0 suggests a bullish market, while a number below suggests a bearish one.
The A/D ratio can be insightful because many stock indexes are weighted to heavily favor large companies and do not reflect how small companies are doing. The A/D line treats each company equally, as a single data point.
When the A/D ratio diverges from big indexes -- for example, it's been showing more companies falling than rising while the major stock indexes have risen -- that may be a sign of trouble ahead.
In general, it's best to avoid trying to time the market. Simply invest your long-term dollars in great companies trading at reasonable prices -- or in low-fee broad-market index funds.
Q. What do brokerages charge to buy or sell a stock? -- H.D., Biloxi, Mississippi
A. Decades ago, it might have cost you hundreds of dollars, but these days, major brokerages typically charge less than $10 per trade, while many charge $0. Good brokerages also generally offer other services, too, such as stock research, banking and/or financial planning. Learn more at Broker.Fool.com.
Fool's School
Is Your Company in Trouble?
It's vital to keep up with your stock holdings regularly. This can help you notice if a company seems headed for trouble. If things get really bad, it might even file for bankruptcy protection, which is generally a disaster for shareholders, causing them to lose most or all of their investments. Here are some red flags to look out for.
If a company has taken on a lot of debt and is close to not being able to meet its obligations, that's a big worry. Many companies make good use of borrowed money to fuel growth, but they should have enough cash coming in to cover debt repayments. You might spot growing debt and shrinking cash on a company's financial statements -- or you might read that the company is trying to restructure its debt, or that it might miss an interest payment.
On a company's income statements, if you see revenue (sometimes referred to as sales) declining, that's a concern -- as is shrinking income (or widening losses). Ideally, a company's revenue and income will both be growing. There may be periods without growth, but if so, keep an eye on the situation. If revenue is declining while debt is growing, that's a major red flag.
A dividend being reduced, suspended or eliminated can also be a red flag, as it means the company needs that cash for something else, even though it had planned to pay it to shareholders. Companies seldom take such actions unless they must.
Major changes in leadership, especially sudden ones, can be a sign of trouble, too -- though sometimes new leaders can turn the business around, making it prosper again.
If you see any worrisome signs from a company in which you're invested or are thinking of investing, take time to dig deeper. You'll need to find out if its troubles seem temporary or lasting -- and whether it seems to deserve your continued investment. If it's no longer among your most promising stocks, move that money into an investment that you like better.
My Dumbest Investment
Learned To Hold
My worst investment was selling my 200 shares of Facebook (now called Meta Platforms) at $24 per share. I made $400, which seemed good at the time. Of course, now the stock is trading around $120 per share. I learned a big lesson: to hold. -- J.M., online
The Fool responds: You certainly learned that lesson the hard way, missing out on a gain of close to $20,000. But don't beat yourself up too much. You couldn't have known then just how big Facebook would get. (There were recently around 2 billion people using Facebook each day.)
With even the most promising stocks, you can rarely be sure that they will be prospering far into the future. Still, if your research suggests that a company is likely to keep growing over many years, it's often worth hanging on.
Indeed, Meta Platforms has seen its stock plunge over 60% from its 52-week high, in part due to the overall stock market decline and in part due to uncertainty about the company. Regulators are investigating the company for antitrust and privacy violations, and Meta has been investing heavily in the "metaverse" -- which may or may not turn out to be worthwhile.
With its shares recently trading at a price-to-earnings (P/E) ratio of 12.2, well below the five-year average of 25.4, you might do a little digging to see if you'd like to own them again.
Foolish Trivia
Name That Company
I trace my roots back to 1900, when 16 partners bought 900,000 acres of timberland in Washington state from the Northern Pacific Railway. I bought my first sawmill in 1902. I helped start the forest fire protection movement. Spruce from my forests was used to build World War I airplanes. Today, with a market value recently near $23 billion, I'm one of the world's biggest private timberland owners, managing about 11 million acres sustainably in the U.S. and more in Canada. I'm also one of the biggest wood-product manufacturers in North America, with around $10 billion in annual revenue. Who am I?
Last Week's Trivia Answer
I trace my roots back to 1932, when two guys started a housewares business that sold plaster gnomes, garden swings and more. In 1935, they bought a bankrupt Vermont sawmill for $25,000, aiming to manufacture their own home furnishings. I debuted a line of colonial-style furniture in 1939, named for an early American hero. I took the hero's name in 1969. Today I'm a major interior design company and manufacturer and retailer of home furnishings. I own 10 manufacturing facilities (including a sawmill and a lumberyard), and about 75% of my wares are made in North America. Who am I? (Answer: Ethan Allen Interiors)
The Motley Fool Take
Dominant -- and Undervalued
If you've ever wanted to be an Amazon.com (Nasdaq: AMZN) shareholder, this is a great time to buy, as its shares were recently down 47% from their 52-week high.
While Amazon.com does face some challenges, they seem to already be factored into the stock price. The year 2022 was rough for the company, and its revenue growth took a breather as the global economy headed into the holiday season amid weak consumer spending and high inflation rates. Indeed, Amazon.com posted a net loss of some $3 billion in the first three quarters of the year
But things could improve this year as Amazon.com slashes costs. It has laid off thousands of corporate and tech employees, cut new businesses and closed or canceled plans for dozens of warehouses. Its Amazon Web Services cloud computing business continues to grow briskly, and its bottom line should improve in e-commerce as it rebalances costs and continues growing.
Amazon.com still has plenty of competitive advantages, such as scale, strong customer service and a powerful distribution network -- and it's a mistake to assume it won't return to earlier profitability levels. (John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. The Motley Fool owns shares of and has recommended Amazon.com.)