Monitoring Market Breadth and Internals

Price indexes tell you where the market went; breadth tells you how it got there. A market that rises on broad participation differs fundamentally from one driven by a handful of mega-cap stocks. Breadth indicators measure the internal health of rallies and declines, often providing warning signals before price indexes confirm a trend change. This article explains how to monitor and interpret the key breadth metrics that professional investors track.

Why Breadth Matters

Breadth measures the number of stocks participating in a market move. Strong breadth confirms that the trend has broad support; weak breadth suggests vulnerability.

The participation concept:

Consider two scenarios where the S&P 500 rises 1%:

Scenario B should concern investors. When the market rises but most stocks decline, the index gains depend on continued strength in a shrinking group of leaders.

Historical precedent: The dot-com bubble (1999-2000) saw the Nasdaq 100 rise while the average stock in the index declined. The S&P 500 reached new highs in 2000 with deteriorating breadth. Both warnings preceded significant corrections.

The Advance-Decline Line

The advance-decline (A/D) line is the most widely followed breadth indicator. It accumulates the daily difference between advancing and declining stocks.

Calculation:

• Daily A/D = Advances minus Declines
• A/D Line = Running cumulative total

Interpretation framework:

The critical warning: Negative divergence

When the S&P 500 reaches a new high but the NYSE A/D line fails to confirm with its own new high, fewer stocks are supporting the rally. This pattern preceded:

• 2000 tech bubble peak (A/D line peaked in April 1998, 2 years before price peak)
• 2007 financial crisis (A/D line diverged starting mid-2007)
• 2018 Q4 selloff (A/D line diverged from September highs)

Reading the A/D line in practice:

Which A/D line to use:

The NYSE A/D line provides the broadest view. Using S&P 500 A/D supplements when assessing large-cap specific conditions.

New Highs Versus New Lows

The ratio of stocks making 52-week highs versus 52-week lows provides a different lens on market health.

Why this matters:

• New highs represent stocks in strong uptrends
• New lows represent stocks in distress
• The ratio tracks the balance of strength versus weakness

Interpretation levels:

Extreme readings:

New high/new low divergences:

When the S&P 500 reaches a new high, new high/new low data should confirm:

Historical example: In January 2020, the S&P 500 hit all-time highs with only 40-80 NYSE new highs daily, down from 200+ earlier in the rally. This divergence preceded the February-March 2020 selloff, though COVID was the proximate cause.

Percentage of Stocks Above Moving Averages

This metric measures how many stocks are in uptrends by comparing current prices to moving average levels.

Common metrics:

Using S&P 500 component data:

Interpretation nuances:

1. Trend versus level: Rising from 30% to 50% is bullish even though 50% is neutral. Falling from 80% to 60% is concerning even though 60% is healthy.

2. Divergences matter here too: If the S&P 500 hits a new high but only 65% of components are above their 200-day MA (versus 80% at the prior high), participation is narrowing.

3. Extremes don't last: Both <20% and >90% readings are unstable. The first often marks bottoms; the second marks conditions ripe for correction.

March 2020 example:

• % above 200-day MA fell to 2% on March 23, 2020
• This extreme reading marked the exact bottom
• Within 6 months, the reading exceeded 90%

Sector Participation Metrics

Healthy markets see most sectors participating in advances. Concentrated leadership in one or two sectors warns of vulnerability.

Sector participation framework:

Sector rotation within participation:

Track not just how many sectors participate, but which ones lead:

2021-2022 example:

Through 2021, all 11 sectors participated in the rally. By January 2022, only 5 sectors were above their 200-day moving averages. By September 2022, only 2 sectors (energy and utilities) maintained uptrends. This progressive narrowing preceded and accompanied the bear market.

Creating a sector dashboard:

Track the count of "Yes" answers weekly. A declining count with rising prices is a divergence.

Breadth Divergences as Warning Signals

Divergences between price and breadth are among the most reliable warning signals in technical analysis. They don't predict timing precisely, but they identify vulnerability.

The divergence formation process:

1. Market makes new high with strong breadth confirmation
2. Pullback occurs, breadth deteriorates
3. Market rallies to new high, but breadth fails to confirm (divergence begins)
4. Pattern may repeat multiple times (multiple divergences compound warning)
5. Eventually, price follows breadth lower

Types of divergences:

2007 case study:

2020 contrast (no divergence):

The February 2020 peak showed no breadth divergence. The A/D line made new highs alongside price. The selloff was exogenous (pandemic), not predicted by internal deterioration. Not all declines come with breadth warnings.

What to do when divergence appears:

Building a Breadth Monitoring Dashboard

Core metrics to track weekly:

Simple scoring system:

Score interpretation:

• +3 to +4: Healthy, full participation
• +1 to +2: Normal, no immediate concern
• 0: Transitional, increase monitoring
• -1 to -2: Cautious, reduce risk
• -3 to -4: Defensive positioning

Data sources:

Limitations and Nuances

When breadth signals fail:

1. Exogenous shocks: COVID-19 crash showed no breadth warning; external events can overwhelm internals.

2. Structural changes: Index concentration (Apple, Microsoft, etc. comprising 25%+ of S&P 500) can cause narrow rallies that persist.

3. International flows: Global capital seeking US equities may concentrate in large-cap, distorting breadth.

Avoid these mistakes:

Breadth Monitoring Checklist

Weekly review:

• Check NYSE A/D line versus S&P 500 for confirmation/divergence
• Record new highs minus new lows (5-day average)
• Note % of S&P 500 above 200-day moving average
• Count sectors above their 200-day moving averages
• Calculate breadth score
• Compare to prior week

Monthly review:

• Assess multi-week divergence patterns
• Review sector participation trends
• Compare current breadth to prior market tops
• Adjust portfolio risk based on breadth score trend

Summary

Market breadth measures the participation underlying price moves. The advance-decline line, new highs versus new lows, percentage of stocks above moving averages, and sector participation each provide different views of internal market health. Divergences between rising prices and deteriorating breadth historically precede significant market declines, often by months. Build a weekly monitoring routine using freely available data, combine multiple indicators into a scoring system, and use deteriorating breadth as a trigger for defensive positioning. Breadth doesn't predict timing precisely, but it identifies when rallies are becoming vulnerable and when conditions favor risk reduction.