Market Breadth Indicators to Watch
Market breadth measures how many stocks participate in a market move. A rally driven by 400 advancing stocks is fundamentally different from one driven by 40. When the S&P 500 makes new highs but fewer than 50% of its components trade above their 200-day moving averages, the index is vulnerable. Breadth indicators quantify this participation gap, giving you early warning signals that price alone cannot provide.
What Market Breadth Actually Measures (Why This Matters)
Price indexes are market-cap weighted. The S&P 500 can rise even when most stocks decline—if a few mega-cap names (Apple, Microsoft, Nvidia) carry the index. This creates a divergence between what the index shows and what the average stock experiences.
Breadth indicators answer a different question: How many stocks are participating in this move?
The practical chain: Index price (what happened) → Breadth reading (how many stocks contributed) → Divergence signal (is participation narrowing?)
When breadth confirms price (both rising together), rallies tend to persist. When breadth diverges (price rising, breadth falling), corrections often follow within 1-6 months.
The Advance-Decline Line (Cumulative Breadth)
The advance-decline (A/D) line is the most basic breadth measure. It tracks the cumulative difference between advancing and declining stocks each day.
The calculation:
Daily A/D Value = Advancing Stocks - Declining Stocks
A/D Line = Previous A/D Line Value + Daily A/D Value
Worked Example: NYSE A/D Line
Day 1: 2,100 stocks advance, 1,300 decline Daily A/D = 2,100 - 1,300 = +800 A/D Line = 0 + 800 = 800
Day 2: 1,400 advance, 2,000 decline Daily A/D = 1,400 - 2,000 = -600 A/D Line = 800 + (-600) = 200
Day 3: 1,800 advance, 1,600 decline Daily A/D = 1,800 - 1,600 = +200 A/D Line = 200 + 200 = 400
Interpretation: A rising A/D line confirms broad participation. A declining A/D line while the index rises signals narrowing leadership—a warning sign.
The durable lesson: Before 2000, 2007, and 2022 market peaks, the NYSE A/D line began declining while the S&P 500 continued making new highs. The divergence preceded corrections by 2-6 months on average.
The McClellan Oscillator (Momentum of Breadth)
The McClellan Oscillator applies exponential moving averages to the A/D line, creating a momentum oscillator specifically for breadth data.
The calculation:
- Calculate the daily A/D difference (advances minus declines)
- Apply a 19-day EMA to get the faster average
- Apply a 39-day EMA to get the slower average
- Oscillator = 19-day EMA - 39-day EMA
Signal thresholds (NYSE):
| Reading | Interpretation |
|---|---|
| Above +100 | Overbought (but strong momentum) |
| +50 to +100 | Bullish momentum |
| -50 to +50 | Neutral zone |
| -100 to -50 | Bearish momentum |
| Below -100 | Oversold (potential bounce setup) |
Worked Example: Interpreting a McClellan Reading
The NYSE McClellan Oscillator reads -85 after a two-week decline. The S&P 500 is down 4%.
Analysis:
- Reading near -100 suggests oversold conditions
- Not yet at extreme oversold (below -150)
- Prior bounces from -80 to -100 zone occurred 70% of the time within 5 trading days
Decision context: An oversold reading is not a buy signal by itself—it indicates conditions where bounces become more probable. The point is: McClellan readings below -100 historically precede short-term rallies, but they don't guarantee them.
New Highs Minus New Lows (Trend Quality)
This indicator counts stocks making new 52-week highs versus new 52-week lows. It measures the quality of trends at the extremes.
The calculation:
NH-NL = Number of 52-week highs - Number of 52-week lows
Interpretation thresholds (NYSE daily):
| Reading | Market Condition |
|---|---|
| Above +300 | Strong uptrend with broad new high participation |
| +100 to +300 | Healthy bull market |
| -100 to +100 | Transitional or mixed |
| -100 to -300 | Weak market, increasing new lows |
| Below -300 | Oversold, capitulation characteristics |
Worked Example: Divergence Warning
Scenario: S&P 500 reaches 5,200 (new all-time high). You check NH-NL data:
- 6 months ago at S&P 4,800: NH-NL = +420
- 3 months ago at S&P 5,000: NH-NL = +280
- Today at S&P 5,200: NH-NL = +95
The warning: Fewer stocks are making new highs even as the index sets records. This declining participation pattern suggests the rally is narrowing to a smaller number of large-cap leaders.
Why this matters: In the 2021-2022 period, new highs peaked in November 2021 while the S&P 500 didn't peak until January 2022. Breadth warned first.
Percent of Stocks Above Moving Averages
This measure shows what percentage of an index's components trade above a key moving average (typically 50-day or 200-day).
Common thresholds:
| Metric | Overbought | Neutral | Oversold |
|---|---|---|---|
| % Above 200-day MA | >80% | 40-80% | <40% |
| % Above 50-day MA | >85% | 35-85% | <35% |
Worked Example: Extreme Readings
March 2020 (COVID crash): Only 2% of S&P 500 stocks traded above their 200-day moving average. This extreme oversold reading preceded a 70%+ rally over the next 12 months.
January 2018: 89% of S&P 500 stocks traded above their 200-day moving average. Within 3 weeks, the index dropped 10% in the "volatility" correction.
The practical point: Extreme readings (below 20% or above 85%) often precede reversals, though timing remains imprecise. These are conditions, not triggers.
Limitations and Risks (What Breadth Cannot Tell You)
Breadth indicators have specific weaknesses:
-
No timing precision: Divergences can persist for months before price reacts. The 1999 tech bubble saw breadth diverge for nearly a year before the eventual crash.
-
Sector distortion: A rotation from growth to value (or vice versa) can show weak breadth even in a healthy market—it's sector-specific weakness, not broad deterioration.
-
Index composition matters: NYSE breadth includes REITs, closed-end funds, and preferred shares. S&P 500 breadth is "cleaner" but narrower. Different data sources produce different signals.
-
Bull market persistence: Strong breadth can persist at "overbought" levels for extended periods in secular bull markets. Selling because breadth is "too high" misses gains.
-
False divergences: Not every divergence leads to a correction. Use breadth as context, not as standalone signals.
Summary Table: Key Breadth Indicators
| Indicator | Calculation | Bullish Signal | Warning Signal |
|---|---|---|---|
| A/D Line | Cumulative (advances - declines) | Rising with price | Falling while price rises |
| McClellan Oscillator | 19 EMA - 39 EMA of A/D | Above +50, especially from oversold | Below -50, especially from overbought |
| New Highs - New Lows | Daily count difference | Expanding with rallies | Contracting at new highs |
| % Above 200 MA | Component percentage | Rising from <40% | Falling from >80% |
Next Steps
- Add one breadth chart to your watchlist—the NYSE A/D line is freely available on most charting platforms (StockCharts, TradingView)
- Check breadth at new highs—when the S&P 500 makes a new high, verify that the A/D line confirms with a new high of its own
- Note McClellan extremes—readings below -100 or above +150 warrant attention, though not immediate action
- Compare current breadth to the last major peak—if fewer stocks are participating than at the prior high, the rally is narrowing
- Use breadth as context, not trigger—never buy or sell solely on breadth readings; combine with price action and risk management rules
Related: Momentum Oscillators: RSI, Stochastics, and MACD | Volume Analysis and On-Balance Volume | Combining Indicators Without Double Counting Signals