Market Breadth
Market breadth measures how many stocks are participating in the price movement of a stock market index. For example, if the S&P 500 index is moving up, one measurement of market breadth would be the fraction of the 500 stocks in the index that are moving up in price. The reason why market breadth is so important is that it allows an investor an effective way to scrutinize and assess the direction and strength of the current trend of the overall stock market. Since research has shown that the majority of an average stock’s price move is due to the direction of the overall stock market, understanding what market breadth is trying to communicate is very important.
Stock market breadth views all stocks in the market with equal weight, and examines what direction those stocks are going. Market breadth is calculated primarily from three types of data – advancing/declining issues (stocks), advancing/declining volume, and/or stocks making new highs or lows. These factors can be looked at individually as raw data, combined with each other to create an indicator, or used as the data to calculate an indicator like a moving average. Market breadth indicators are also referred to as internal indicators, because they allow you to look inside what is driving stock market prices in a particular direction.
Market breadth is a powerful way to size up a market move, and should be a tool that you use to determine if it is the right time to invest.
