Market breadth refers to the theory that states that the strength of the stock market depends upon the movement of all of the stocks in the market. This flies in the face of the theory that the entire market is driven by a few major stocks. If the market breadth signals are strong, it tends to mean that the market is trending upwards, while poor signals indicate a downturn. Some of the tools available to investors who believe in this theory are volume statistics, statistics comparing the amount of stocks rising with the amount falling, and the comparison of stocks reaching yearly highs and stocks reaching yearly lows on a given day.
While some investors like to narrowly focus their attention on individual stocks, others won’t make a move on a stock until they can glean how the market is doing as a whole. These investors want to know if the market is a bull market, which means it is trending positive and being driven by optimistic investors, or if it is a bear market, which means that it is trending negative and investors are trying to get out of their old positions rather than into new ones. Market breadth is an attempt to determine market momentum by looking at the entirety of the market.
The advantage of market breadth indicators is that they might be able to distinguish when other market indicators may be off target. A few big stocks could be rallying at a particular time, and the magnitude of those stocks could significantly skew certain market averages. If a large majority of the remainder of the stocks on the market are in decline at the same time, it’s likely that those big stocks could be distorting the overall picture.
How many stocks are rising and falling and the volume of stocks being sold are two great indicators of market breadth. Using the advance-decline line, which measures the difference between stocks on the rise and stocks that are falling on a particular day, and charting the difference over a specific period of time can help to spot rising and falling trends. In conjunction, the total volume of on-the-rise stocks bought as opposed to the amount of dropping stocks bought can indicate the reliability of those trends.
There are many other statistics available to those analyzing market breadth, and one of the most important is the comparison of 52-week highs or lows. These occur when stocks either reach their high point for the last year or their low point for that same time period. Comparing the amount of highs against the lows can show if there is a strong surge taking place, or, by contrast, a heavy drop occurring.