Market breadth indicators measure internal statistics for a stock index or exchange and provide unique insight to the health of trends. These tools are less widely followed by the masses, largely due to issues with changes in the underlying data. Understanding some key items about these issues will help you efficiently navigate breadth indicators available to you.
- Market breadth data can vary by provider and is less broadly available
- The number of securities included in the data varies over time, impacting analysis
- Tendencies for breadth can vary by market type (bullish or bearish)
A top resource for understanding breadth is Greg Morris’ 2005 book: “The Complete Guide to Market Breadth Indicators.” Mr. Morris includes practical discussion on a very comprehensive list of indicators
Building Blocks for Breadth Indicators
To get things started, Table 1 provides the primary measures used when calculating breadth indicators and is broken into four areas.
Table 1 Breadth Component Data
It’s hard to imagine that dozens of different indicators are available from this shortlist. The reason there are so many different variations for the same statistics goes back to the second item on the “Key Issues” list. With exchanges varying the number and type of securities included with daily breadth statistics, analysts need to incorporate ratios and occasionally smoothing techniques to obtain chart views that will provide insight over the years. Pure advance or decline lines with no adjustment will result in indicator levels that mean different things at different times.
In a keeping it simple approach, Figure 1 provides a daily line chart for the NYSE Composite Index (blue) and percentage of advancing issues. There are two steps to creating the breadth line on the lower portion of the chart.
- Step 1: Calculate % Advancers = # of Advancers / (# of Advancers + # Decliners)
- Step 2: Calculate 21-day Simple Moving Average [SMA] of the %Advancers
Microsoft® Excel® was used to create the line chart with data downloaded from Worden Brothers, Inc.’s TeleCharts® package.
Figure 1 NYSE Composite Index and 21-day SMA of % Advancing Issues (5/2010-4/2012)
The early April decline in the NYSE Composite was preceded by a decline in the 21-day SMA of %Advancers that began in late January. This diverging action served as a warning that the current uptrend was starting to weaken. More recently the breadth indicator has confirmed price action with both bottoming towards mid to late April.
Summary & Up Next
There are quite a few breadth indicators given the relatively small number of components used. Many reflect variations on the same idea, so with this in mind, be sure to avoid using such breadth indicators as a confirming tool. Next week a few widely followed breadth indicators will be discussed.
Morris, G. (2005). The Complete Guide to Market Breadth Indicators. New York, NY: The McGraw-Hill Companies.
Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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