Outside the Box: Getting a Handle on the Broad Market Statistics

The idea of market breadth refers to the overall efficacy of the equities market, whether it is in an upward or downward direction. This type of market analysis is particularly important to technicians when attempting to determine if current market movement will continue, or if the current momentum is reaching a point of exhaustion.

Several indicators can be used to measure market breadth, but by far the most popular measure is the advance-decline index and its associated advance-decline line. The advance-decline line index totals the daily number of equities advancing in price minus the daily number of equities declining in price.

If the advance-decline index moves in the same direction as the market most technicians would conclude that the market has a high probability of continuing to move in that same direction. The advance-decline line is what results from plotting the advance-decline index over a period of time. If looking at the advance-decline graph, you would use the general direction of the line to confirm movements in the market.

Some of the other indicators that measure market breadth are the up/down volume, and new highs and new lows statistics. The up/down volume indicator measures the volume on up and down days in the market. , price changes on light volume are more tied to just the daily fluctuations in the trend, which technical analysts basically ignore. However, high volume moves correlated with larger price changes can indicate reversal of the trend, especially if there is a volume spike. Usually a daily volume change of 90 percent or more signals a trend reversal. Also, the new highs and new lows data tracks the performance of individual stocks making new highs or new lows, and that goes a long way in determining market breadth. 

Another popular indicator is the Short-Term Trading index, also commonly referred to in the press as the TRIN. The Short-Term Trading index gauges average volume of market advancers relative to the average volume of market decliners, typically using a weekly timeframe.  In general technician’s view, a high Short-Term Trading index as a buy signal indicating a correction’s bottom, and low Short-Term Trading index as a sell signal indicating a market top. The actual ranges of figures used for the TRIN typically are .70 for the low and 1.50 for the high. If these boundaries are crossed, then buy and sell signals are generated on a technical basis.

The Market price earnings ratio, which is the collective price earnings ratio of the Dow Jones Industrial Average, is also used to measure market breadth. In the past, a reading below 5 has indicated a market bottom, while a reading above 25 has signaled that the market may have peaked. You need to exercise caution, however, when applying these absolute numbers because abnormal earnings can skew these figures which makes it paramount that you are well aware of the current earnings climate when employing this indicator.

Finally, there is the Dow Jones Industrial Average Dividend Yield indicator, which measures market breadth. The thinking behind this indicator is that high yield means big dividends relative to price. But in a bull market, daily stock prices rise faster than quarterly dividends. So as the bull charges and prices soar, yields decline sharply. Conversely, the reverse is true in bear markets because plummeting prices drive up yield. Historically technicians have seen the yield get as low as 3 percent at market tops and as high as 18 percent at market bottoms.

There are a variety of indicators and statistics that an analyst can use to get a reading on market breadth. Keep in mind, however, that when you hear references to market breadth in the financial media outlets, they more often than not are basing it on the advance/decline line, which, by far, is still the most popular technical tool in reporting the breadth of the market.

Happy Trading.

Jeff Neal 
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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