Market Breadth
I've talked about this subject recently, but I think it bears repeating given that the market appears to be rotating away from a select number of positions providing returns for the overall market. I hope this provides additional insight.
As you probably know, market indices are heavily impacted by the largest weighted positions in a particular index. This sometimes creates a false impression of overall market health.
For example, if you have 100 stocks and 10 do very well but the other 90 do not, can we really say the "market" is healthy? A much healthier condition is when more than just a limited number of stocks are providing investment returns.
This concept, market breadth, is a data point we are aware of and factors into our overall investment strategy as we invest assets. It allows us to be opportunistic as well as identify areas of the market that might be at more reasonable valuations.
A recent article highlighted excerpts are provided below.
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"What Does Market Breadth Indicate?
Traders and investors use market breadth in order to assess the index’s overall health. Market breadth can be a reliable, if not an accurate, indicator of an upcoming price rise in the index. Similarly, it can also provide early warning signs for a future price decline.
Market breadth indicators, although useful, do not always give an accurate picture of the market. Sometimes, they may fail to predict future changes in the direction of price movements, which are also known as price reversals. Other times, market breadth may signify a reversal way too early.
When the number of stocks undergoing an advancement is larger than the number of stocks declining, the phenomenon is known as positive market breadth. It implies that the prevailing market sentiment is bullish and confirms an overall rise in the prices of individual securities part of the index.
On the other hand, when a larger number of companies are witnessing a decline in their stock prices, a negative market breadth occurs. It means that the prevailing market sentiment is bearish, as characterized by a fall in the stock index.
When the index is rising, and positive market breadth is observed, it is said to be in confirmation. On the other hand, if the index is rising but a negative market breadth is observed, or vice versa, it is said to be in divergence. Most traders look for confirmation of divergence to evaluate whether or not the indicator is reliable."
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Source:
https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/market-breadth
Note: The information presented above is for informational purposes only. This is not a recommendation to buy or sell any securities.
