Dancing with the Trend

WHY Breadth?


I have written often about market internals or market breadth.  In fact, there was a whole series of articles as I was updating my “The Complete Guide to Market Breadth Indicators” book.  The articles began with CGMBI; there were 10 of them, all back near the beginning of my article list.  See links at end of this article. What you may not know is that every breadth indicator in the book is now part of StockCharts.com’s Symbol Catalog.  They all begin with !BI followed by two letters identifying the exchange they are from (NY for New York, NA for Nasdaq, and TO for Toronto).  More on this sales job at the end of this article.

Why Breadth?

1. It takes advantage of inefficient markets.  If investors are irrational and prone to excessive optimism with the latest hot stocks and excessive pessimism with those issues that have suffered recently, then market capitalization weighting reflects those inefficiencies from its very definition of shares times price.  Breadth, which is equal weighted, does not have that problem.

2. Avoids heavy concentration into a few stocks.  Market capitalization weighting often causes a large portion of a portfolio to be concentrated in only a few issues – concentration risk. Breadth totally avoids this.

3. Get more exposure to small capitalization stocks.  Merely by the concept of capitalization weighting, small stocks will have a smaller effect on the portfolio. True, they are generally considered riskier, but they have also had historically stronger performance.  Breadth deals with large and small capitalization stocks equally.

Breadth analysis is like quantum mechanics, it does not predict a single definite result, instead it predicts a number of different possible outcomes, and tells us how likely each one will be.  Breadth directly represents the market, no matter what the indices are doing.  It is the footprint of the market and the best measure of the market’s liquidity.

Most breadth indicators are at best, coincident indicators, and usually somewhat lagging.  Any of the indicators that are smoothed with moving averages are certainly lagging.  Lagging means that the indicator is only telling you what is happening after it has happened.  Lagging is not a problem, once you realize that picking exact tops and bottoms in the market is better left to gamblers.  The confirmation of lagging indicators, however, is very important.  Some breadth indicators, especially some of the ratios, can offer leading indications based upon the identification and use of previous levels or thresholds that are consistent with similar market action.  An oscillator that reached a threshold level, either positive or negative, with consistency relative to market tops and bottoms is such an indicator.  Many breadth indicators work in this manner.

A Familiar Breadth Indicator

Most investors are familiar with the long-running Friday night show, Wall Street Week, on Public Broadcasting hosted by Louis Rukeyser, who, every week would comment on his elves (his term for technical analysts) and the Wall Street Week Index.  What you may not have known is that this index was a composite of ten indicators, three of which were breadth-based.  Robert Nurock, long-time panelist and Chief Elf, created it.  Robert Nurock was the editor of the Astute Investor, a technical newsletter for many years.

The Arms Index (also known as TRIN), created by long time friend Dick Arms) was one of the indicators in the Wall Street Week Index.  A 10 day moving average was used with bullish signals given when it was about 1.2 and bearish when it was below 0.8.  The advances minus the declines were used over a 10 day period and bullish signals were from the point where the index exceeds 1000 to a peak and down to a point 1000 below the peak.  Bearish signals were just the opposite.  The third breadth indicator used was the new highs compared to the new lows.  For bullish signals an expansion of the 10 day average of new highs from less than 10 up to 10 day average of new lows.  Similarly, bearish signals were an expansion of 10 day average of new lows from less than 10 until it exceeds the 10 day average of new highs.

More Information on StockCharts.com’s breadth indicators

If you search on: ! (exclamation point), you will find a vast amount of breadth indicators of Carl Swenlin’s and others, including symbols for common stock only series.

A brief sales pitch to follow:  After over a year of work with many of the fine folks at StockCharts.com, the book is now available in Kindle format from Amazon.  You can click HERE to go to the Amazon page.  I priced it to sell – only $19.99.  It has lots of new material from Tom McClellan, George Schade, and Dick Arms, plus all of the charts are from StockCharts.com.  Plus, an entirely new chapter (11) on non-internal breadth indicators.

And even more good news, we (StockCharts.com and I) have created a ChartPack that has all of the charts in the book, not only for the New York Exchange (in the book), but also for the NASDAQ Exchange and the Toronto Exchange.  The ChartPack has 187 charts for the NYSE, 187 for the NASDAQ, and 148 for the TSX Toronto.  Toronto is slightly fewer because not all of the breadth data was available, in particular, the weekly breadth data.  CGMBI ChartPack – Click Here.  This ChartPack means that you have every chart in the book plus the NASDAQ and TSX versions updated each day (each week for weekly data).  The ChartPack is only $49.95 and is good as long as you are a subscriber to StockCharts.com.  The other really nice feature of publishing with Kindle is that if I want to add something to the book, say I discover a new breadth indicator, I can do so.  And everyone who bought the book will receive the update for free.

Here are links to the CGMBI articles:

Why Market Breadth is so Important (CGMBI)

Additional and Necessary Information about Market Breadth (CGMBI)

Advance Decline Ratio Indicators (Chap. 5 CGMBI)

Advance Decline Difference Indicators (Chap. 4 CGMBI)

Advance Decline Difference Indicators (Chap. 4, part 2 CGMBI)

Advance Decline Misc. Indicators (Chap. 6 CGMBI)

New High New Low Indicators (Chap. 7 CGMBI)

Up Volume Down Volume Indicators (Chap. 8 CGMBI)

Composite Indicators (Chap. 9 CGMBI)

Non-Internal Breadth Indicators (Chap. 11 CGMBI)

Chap. 10 was dedicated to the Indicators of Sherman, Marian, and Tom McClellan.  In fact, I went on record stating that the McClellan Summation Index was my favorite breadth indicator. Tom wrote the foreword for The Complete Guide to Market Breadth Indicators.  Finally, I think I just set a record for the most number of links in a single article.

Dance with the Trend,

Greg Morris

Greg Morris
About the author: has been a technical market analyst for over 45 years ranging from analysis software development, to website analysis and education, to money management. He has written four books: Candlestick Charting Explained (and its companion workbook), The Complete Guide to Market Breadth Indicators, and Investing with the Trend. A graduate of the Navy Fighter Weapons "Top Gun" School, Greg is a former Navy fighter pilot who flew F-4 Phantoms on the USS Independence.  He also holds a degree in Aerospace Engineering from the University of Texas. Greg has a long history of understanding market dynamics and portfolio management. Learn More
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