Market Breadth Explained — Step-by-Step Guide & Transcript

[00:00] As investors, we have many tools for reading and understanding what's going on in the market. Things like market trend, distribution day count, follow-through days, price and volume indicators,

[00:15] and many other things help us assess the health of the stock market at any given time. So today we're talking about another key indicator known as breadth. Breadth simply measures the number of stocks advancing relative to those that are declining

[00:29] in a given index or on a stock exchange, such as the New York Stock Exchange or the Nasdaq. Positive breath occurs when more stocks are rising rather than falling. If we see positive

[00:41] breath in a bullish market, this confirms that bulls are indeed in charge of the current momentum and is a sign of a healthy uptrend. However, when there is a higher number of declining stocks

[00:53] relative to advancing stocks, this indicates underlying weakness and that bears are indeed in control of the momentum. Breath can be an important indicator to show investors what's going on under the hood, so to speak. Sometimes you may find that an index is rising, yet more

[01:09] than half the stocks in that index are falling. For example, 50% of the S&P 500's performance could be attributed to the top seven stocks. These top seven are usually mega caps like Apple,

[01:22] Microsoft, or Google. That means a small number of stocks can drag the whole index higher, masking what's really going on underneath. Market breadth indicators can reveal the hidden depths of what's going on and can help warn traders

[01:35] that most stocks aren't actually performing well, even though a rising index is making things look good on the surface. There are a number of market breadth indicators that you can use At IBD we frequently reference the advanced decline This indicator is known as the AD line and calculates a running total of the difference between the number of advancing and declining

[01:55] stocks. For IBD investors, the general market indicators PDF is available at the bottom of every big picture column. That's a great place to see the NASDAQ and NYSE advanced decline lines.

[02:07] Another way to find this breadth indicator is by using the ticker symbols GMIAA and GMIAB in Marketsmith. GMIAA shows the NYSE advanced decline line while GMIAB shows the NASDAQ AD line.

[02:22] So let's take a closer look at the AD line on Marketsmith. This NASDAQ AD line from August to December 2022 was trending lower, then it broke above a downward sloping trend line in early January. That coincided not only with a follow-through day on January 6th, but a strong

[02:39] advance in the market. Notice how the AD line itself also continued to rise in that period. So not only does this line help you understand the overall picture, but you can look at shorter time

[02:51] periods to take advantage of ideal market conditions for actively managing your portfolio. To summarize, market breadth allows active traders to take a look under the hood and see what's going on in the market beneath the surface. The most important thing to keep in mind is this,

[03:07] If the market is healthy, you'll see more advancers than decliners, more growth sectors doing well, and more stocks hitting new highs after breaking out. The goal of breadth is to determine the underlying strength or weakness in a given index.

[03:20] This can then be used to confirm the overall trend of that index.

[03:37] you