Breadth of the Market Definition
Breadth of the market represents the number of stocks participating in a particular market’s move as a percentage of the total number of stocks.
For example, let’s take the S&P500 index, which contains 500 stocks. If the S&P500 index is rising on a particular day and of the 500 stocks included in the index 450 stocks are increasing, the market has a very good breadth (90% of stocks).
Conversely, if the S&P500 is rising, but only 100 out of the 500 individual stocks record gains, it means that the market’s increase is driven only by a small number of large issues and the breadth of the market is small.
Breadth of the Market as an Indicator
In traditional technical analysis, high market breadth (the market’s move shared by majority of the stock issues) is a sign of confirmation of the move’s direction. For example, if the stock market is falling and 80% of the individual stocks also record losses for the day, it is a sign of weakness and of the market continuing to move down.
On the other hand, if the stock market is falling, but only 30% of individual stocks are losing, the breadth of the market is quite small for the down move and it is the sign that the market might turn upwards soon, as the downtrend does not have a good foundation.
Advance/Decline Line or Index
A variation of the market breadth concept is the advance/decline index (or advance decline line or advance/decline indicator), which equals the number of advancing stocks less the number of declining stocks plus the previous day’s advance/decline index. The A/D line represents the continuous indicator of market breadth – it rises when more stocks are advancing, and it falls when more stocks are falling – regardless of the direction of the stock market index (like the S&P500).
Breadth Ratio is another measure of breadth of the market. Similarly to the Advance/Decline line or index, it compares the number of rising stocks to the number of falling stocks in a particular period. But unlike the A/D line, the breadth ratio divides the number of rising stocks by the number of falling stocks.
Breadth ratio can be measured for any time period, but most typically for a day, week, or month.
Breadth Ratio Range of Values
Because the numbers of advancing and declining stocks can’t be negative, the breadth ratio can reach only positive values. The closer the breadth ratio is to zero, the greater share of individual stocks in the market is declining. Conversely, the higher the breadth ratio, the greater the percentage of advancing stocks. The maximum value the breadth ratio can reach is infinite in case when all stocks in the market are rising during the period measured.