Market Breadth: Definition, Indicators, and How Investors Use It

What Is Market Breadth?

Market breadth indicators analyze the number of stocks advancing relative to those that are declining in a given index or on a stock exchange, such as the New York Stock Exchange (NYSE) or Nasdaq. Positive market breadth occurs when more stocks are advancing than are declining. This suggests that the bulls are in control of the market's momentum and helps confirm a price rise in the index. Conversely, a disproportional number of declining securities is used to confirm bearish momentum and a downside move in the stock index.

Certain breadth indicators also incorporate volume. They will not only look at whether a stock is advancing or declining in price, but also at the volume of those moves. This is because price moves on larger volume are considered to be more significant than price moves on lower volume.

Key Takeaways

  • Market breadth looks at the relative change of advancing to declining securities in a market.
  • It is a technical analysis technique that gauges the strength or weakness of moves in a major index.
  • When more stocks are advancing than declining, it suggests bullish market sentiment and confirms a broad market uptrend.
  • Conversely, a large number of declining securities confirms bearish momentum and a downside move in the stock index.
  • Certain breadth indicators also incorporate volume.

Understanding Market Breadth

Market breadth refers to how many stocks are participating in a given move in an index or on a stock exchange. An index may be rising yet more than half the stocks in the index are falling because a small number of stocks have such large gains that they drag the whole index higher.

Market breadth indicators can reveal this and warn traders that most stocks are not actually performing well, even though the rising index makes it look like most stocks are doing well—an index is an average of the stocks in it. Volume may also be added into these indicator calculations to provide additional insight into how stocks within an index are acting overall.

Market breadth attempts to find how much underlying strength or weakness there is in a given stock index. By assessing the strength or weakness, which isn't plainly visible by looking at a chart of the index, technical traders gain insight into what the index may do next.

A large number of advancing stocks is a sign of bullish market sentiment and is used to confirm a broad market uptrend. A large number of declining stocks shows sentiment is bearish, which would align with an index downtrend. When measuring market breadth, many indicators look at the number of advancing and declining stocks, or the number of stocks that have created a recent 52-week high or low. This data can provide information about whether an index uptrend or downtrend is likely to continue.

Traders use market breadth indicators to assess the overall health of a market/index. Market breadth indicators can sometimes provide early warning signs of a drop in the index, or forecast a coming rise in the index.

Market Breadth Indicators and Uses

There are a number of market breadth indicators. Each is calculated differently and therefore may provide slightly different information. Some indicators look at the number of advancing or declining stocks, others compare stock prices to another benchmark, and a few incorporate volume.

The tactic for most market breadth indicators is to monitor for confirmation and divergence. Confirmation is when the indicator is moving favorably and the index is rising. Divergence is when the index and indicator move in opposite directions. This warns that the index may see a reversal soon.

Market breadth indicators are poor timing signals. They may provide signals way too early or may not forecast an index reversal that does occur.

Here is a sampling of the market breadth indicators available.

  • Advance-Decline Index: This indicator, also known as the A/D line, calculates a running total of the difference between the number of advancing and declining stocks. Traders typically look for divergence between the indicator and a major market index, such as the Standard & Poor’s 500 index (S&P 500). For example, if the S&P 500 is rising and the A/D index is falling, it indicates the current uptrend in the index may be losing its momentum. On the other hand, if the S&P 500 is falling and the A/D index is rising, it suggests that the move lower in the index may be about to reverse.
  • New Highs-Lows Index: The new highs-lows indicator compares stocks making 52-week highs to stocks making 52-week lows. A reading below 50% indicates that more stocks are reaching their lows compared to stocks that are reaching their highs and could signal a move into a bear market. Contrarian investors may use this market breadth indicator to buy or sell stocks when it gives extreme readings, such as below 30% or above 70%.
  • S&P 500 200-Day Index: Traders can use this index to see what percentage of stocks in the S&P 500 are trading above their 200-day moving average. A rising indicator above 50% indicates broad market strength. Similar to the new highs-lows index, traders often look for extreme readings to find overbought and oversold conditions in the broader market. Short-term traders who want a more sensitive moving average to provide earlier signals can use a 50-day index that shows what percentage of stocks are trading above their 50-day moving average.
  • Cumulative Volume Index: This indicator measures volume. Stocks that rise have their volume added to the positive volume. Stocks that declined have negative volume. The indicator keeps a running total of whether the overall volume is positive or negative, and by how much, and is used in a similar fashion to the A/D line.
  • On-Balance Volume: This indicator also looks at volume, except up or down volume is based on whether the index rises or falls. If the index falls, the total volume is counted as negative. If the index rises, the total volume is negative. Each day is added or subtracted from prior readings to give a running total. It is used in a similar way to the A/D line.

Example of Market Breadth Analysis in Action

The following chart shows the SPDR S&P 500 (SPY) ETF along with the on-balance volume indicator and the cumulative volume index (for all US stocks).


Image by Sabrina Jiang © Investopedia 2021

During the rise in the S&P 500 on the left, the cumulative volume index confirmed the rise, as the indicator continued to make higher highs along with the S&P 500. On-balance volume told a different story, as the indicator was mostly flat, issuing a warning sign that there was some underlying weakness in the rise. This was followed by a steep price decline.

When the S&P 500 ETF rebounded, so did the market breadth indicators.

What is meant by market breadth?

Market breadth looks at the breadth of the market. It seeks to determine the strength of moves in an index, generally by examining the number of stocks that are rising relative to those that are declining.

What is market breadth and depth?

Market breadth studies the strength or weakness of moves in a major index. Market depth, on the other hand, is a market's ability to handle relatively large orders without significantly impacting the price of a security.

Is market breadth a good indicator?

Market breadth indicators derive their information from price and volume. They judge market sentiment. But like all indicators it is always best to confirm information with price. A good rule of thumb is to never base trading decisions on what the indicator is saying. Always confirm with price.

The Bottom Line

When investors use the phrase market breadth, they are talking about a set of technical indicators that evaluate price movements in a given stock index. Sometimes, an index may rise even though more than half of its constituents are falling. Market breadth indicators will let us know if this is the case.

The goal of market breadth is to determine the strength or weakness of moves in a major index. This information should be used to confirm what price action is doing. When more stocks are advancing than declining, it suggests the bulls are in control. Conversely, when more securities in the index are falling, it suggests the opposite. Because markets trend, rising or falling momentum may indicate rising or falling price trends.

Open a New Bank Account
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.