Breadth of the Market

Breadth of the market definition

Breadth of the market represents the number of stocks participating in a particular market’s move as a percentage of the total number of stocks.

For example, let’s take the S&P500 index, which contains 500 stocks. If the S&P500 index is rising on a particular day and of the 500 stocks included in the index 450 stocks are increasing, the market has a very good breadth (90% of stocks).

Conversely, if the S&P500 is rising, but only 100 out of the 500 individual stocks record gains, it means that the market’s increase is driven only by a small number of large issues and the breadth of the market is small.

Using market breadth as an indicator

In traditional technical analysis, high market breadth (the market’s move shared by majority of the stock issues) is a sign of confirmation of the move’s direction. For example, if the stock market is falling and 80% of the individual stocks also record losses for the day, it is a sign of weakness and of the market continuing to move down.

On the other hand, if the stock market is falling, but only 30% of individual stocks are losing, the breadth of the market is quite small for the down move and it is the sign that the market might turn upwards soon, as the downtrend does not have a good foundation.

Advance/Decline line or index

A variation of the market breadth concept is the advance/decline index (or advance decline line or advance/decline indicator), which equals the number of advancing stocks less the number of declining stocks plus the previous day’s advance/decline index. The A/D line represents the continuous indicator of market breadth – it rises when more stocks are advancing, and it falls when more stocks are falling – regardless of the direction of the stock market index (like the S&P500).

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Topics: Technical Analysis

Breadth of the Market