Market breadth indicators measure the degree to which individual stocks participate in market moves. Strong breadth confirms the sustainability of trends, while deteriorating breadth often warns of impending reversals before they become apparent in major indices.
Key Breadth Indicators
The advance/decline line tracks the cumulative difference between advancing and declining stocks. The percentage of stocks above their 200-day moving average reveals trend participation. New high/new low data shows the strength of buying pressure or selling pressure across the market.
Breadth Divergences
When major indices make new highs but fewer stocks participate, the rally is on shaky ground. This type of divergence preceded major market tops including 2000 and 2007. Conversely, improving breadth during market declines often signals that a bottom is forming.
Sector Analysis
Examining breadth across sectors provides additional insight. Healthy markets typically see broad sector participation. When leadership narrows to just a few sectors or mega-cap stocks, it often signals late-cycle dynamics and elevated timing risk.
Practical Application
Market breadth is most useful as a confirmation tool for timing decisions. Strong breadth supporting an uptrend suggests staying invested, while deteriorating breadth in a rising market warrants defensive positioning. Many systematic timing models incorporate breadth metrics alongside price-based indicators.