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Expanding Market Breadth

Market breadth is a very important concept that have been extremely useful to forecast the future market strength of a market in question. It is primarily based on the premise that for a trend to sustain and continue the market in question need also to continue to expand and to broaden. That is, the more securities that rise or fall in a market can lead to a rise or a decline in the overall market index. There are several popular market breadth indicators including the advancing issues minus declining issues, % of stocks trading above its 200-day moving average, and equal-weight indexes.

Any divergences between market breadth indicators and price trend can warn of a major turning point in the market. Ahead of the 2000-2002 Tech/Telecom debacle market breadth negatively diverged from its price trend. This warned of a major market top. This same divergence also occurred just before the 2007-2009 Global Financial crisis. Equity indexes were recording all-time highs on the backdrop of declining market breadths. As we fast forward to today many investors are concerned about the length of the current bull rally and question the sustainability of this bull run.

Enclosed below are three key US indexes including S&P 500 Index (SPX), NASDAQ 100 Index (NDX) and the Dow Jones Industrial Average (INDU) and the respective market breadth indicators. It would appear the 6.5-year secular bull rally still has legs based on the respective constructive market breadth indicators.

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