Market Breadth

What Is Market Breadth?

Market breadth indicators analyze the number of stocks advancing relative to those that are declining in a given index or on a stock exchange, such as the New York Stock Exchange (NYSE) or Nasdaq. Positive market breadth occurs when more stocks are advancing than are declining. This suggests that the bulls are in control of the market's momentum and helps confirm a price rise in the index. Conversely, a disproportional number of declining securities is used to confirm bearish momentum and a downside move in the stock index.

Certain breadth indicators also incorporate volume. They will not only look at whether a stock is advancing or declining in price, but also at the volume of those moves. This is because price moves on larger volume are considered to be more significant than price moves on lower volume.

Understanding Market Breadth

Market breadth refers to how many stocks are participating in a given move in an index or on a stock exchange. An index may be rising yet more than half the stocks in the index are falling because a small number of stocks have such large gains that they drag the whole index higher.

Market breadth indicators can reveal this and warn traders that most stocks are not actually performing well, even though the rising index makes it look like most stocks are doing well — an index is an average of the stocks in it. Volume may also be added into these indicator calculations to provide additional insight into how stocks within an index are acting overall.

Market breadth attempts to find how much underlying strength or weakness there is in a given stock index. By assessing the strength or weakness, which isn't plainly visible by looking at a chart of the index, technical traders gain insight into what the index may do next.

A large number of advancing stocks is a sign of bullish market sentiment and is used to confirm a broad market uptrend. A large number of declining stocks shows sentiment is bearish, which would align with an index downtrend. When measuring market breadth, many indicators look at the number of advancing and declining stocks, or the number of stocks that have created a recent 52-week high or low. This data can provide information about whether an index uptrend or downtrend is likely to continue.

Traders use market breadth indicators to assess the overall health of a market/index. Market breadth indicators can sometimes provide early warning signs of a drop in the index, or forecast a coming rise in the index.

Market Breadth Indicators and Uses

There are a number of market breadth indicators. Each is calculated differently and therefore may provide slightly different information. Some indicators look at the number of advancing or declining stocks, others compare stock prices to another benchmark, and a few incorporate volume.

The tactic for most market breadth indicators is to monitor for confirmation and divergence. Confirmation is when the indicator is moving favorably and the index is rising. Divergence is when the index and indicator move in opposite directions. This warns that the index may see a reversal soon.

Market breadth indicators are poor timing signals. They may provide signals way too early or may not forecast an index reversal that does occur.

Here is a sampling of the market breadth indicators available.

Example of Market Breadth Analysis in Action

The following chart shows the SPDR S&P 500 (SPY) ETF along with the on-balance volume indicator and the cumulative volume index (for all US stocks).

Image by Sabrina Jiang © Investopedia 2021

During the rise in the S&P 500 on the left, the cumulative volume index confirmed the rise, as the indicator continued to make higher highs along with the S&P 500. On-balance volume told a different story, as the indicator was mostly flat, issuing a warning sign that there was some underlying weakness in the rise. This was followed by a steep price decline.

When the S&P 500 ETF rebounded, so did the market breadth indicators.