What Market Breadth Really Tells You

One of the most common mistakes investors make is confusing index performance with actual market health. The S&P 500 can hit new highs while the majority of stocks are struggling—and that's where breadth analysis becomes critical.

Why Breadth Matters

Market breadth measures how many stocks are participating in a move. Strong breadth = sustainable rally. Weak breadth = fragile advance that's vulnerable to reversal.

Healthy

When breadth is strong, we see a Healthy market dashboard where:

Advances outnumber declines significantly
New highs expand across sectors
Small caps keep pace with large caps
Volume confirms the directional move

Key Breadth Indicators

Advance-Decline Line

The cumulative advance-decline line shows the running total of advancing vs. declining stocks. When this diverges from the index, pay attention.

Bullish: A/D line making new highs with the index
Bearish: Index making new highs while A/D line lags

New High-New Low Index

The number of stocks hitting 52-week highs vs. lows reveals leadership strength.

Healthy: 200+ new highs, minimal new lows
Warning: Fewer than 100 new highs despite index strength

Percentage of Stocks Above Moving Averages

This shows how many stocks are in uptrends vs. downtrends.

Above 70%: Overbought but strong
40-60%: Neutral, mixed environment
Below 30%: Oversold, weakness prevailing

Practical Application

Bullish

When breadth is strong, our Four State model tends toward Bullish, signaling:

Higher equity allocation is appropriate
Growth and momentum strategies work
Risk-on positioning makes sense

Common Breadth Divergences

January 2022: S&P 500 hit new highs while breadth deteriorated for weeks. Result? 25% decline.

March 2020: Breadth improved weeks before indices bottomed, signaling accumulation.

Bottom Line

Don't just watch the indices. Watch what the majority of stocks are doing. Breadth gives you the real story—and often warns you before the headlines catch up.

Discipline means using all available data, not just price.

Understanding Market Breadth: The Key to Reading Market Health