Trend Breadth

Market Breadth - A Better Measure

There are many who look to market breadth as a means to determine what’s really going on underneath the market covers so to speak. That typically takes the form of raw or smoothed averages of advancing versus declining issues either on a daily or weekly basis over some period of time.

The more popularized measures are the simple advance to decline ratio, on balance volume and the McClellan Summation index although there are more.

What all these measures attempt to do is to measure the participation in the market and whether it is positive or negative. Are an increasing number of stocks being bought or sold?

All currently accepted measures use a daily examination of a stocks ending price relative to the price the day or week before. But is that the best measure.

It is an accepted fact that trend is your friend. If the market is trending higher you want to be participating and if lower you don’t. So why not based market breadth on trend?

The primary reason that hasn’t been done is because there is little in the way of publicly available data that systematically assigns trend to each stock. At TA Today we do this on a daily basis and thus we have the ability to create breadth measures based on trend. 

Their real value is twofold:

  • When divergence develops telling you that what you see in the stock market is not what really is happening in the stock market. That divergence can be positive (more stocks in bullish trends than sideways or bearish ones yet price isn't reflecting that on a relative basis) or negative (more stocks in bearish trends than sideways or bullish ones yet price isn't reflecting that on a relative basis). The latter is what is happening now in the general market and in many sectors because the number of bullish trends has been unable to reach new highs while price has.

  • When the number of bullish and bearish trends reach extremes. When that happens, the market needs to digest its gains or losses i.e. it will either retrace or bounce soon depending on the extreme.

When either of the above takes place, what you see in the indexes are a mirage. Things are not what they seem and a change is in the air.