The Strength Of Breadth

Most of the time, the public is exposed to the statistic of price to measure market activity, whether the indices or their specific holdings. While this can certainly measure current action, it does not reveal any underlying strength or weakness. How can we be sure that price trends will continue? In order to have confidence of trend continuation, it’s important to have a gauge of market breadth.

A sage and wizened colleague of mine, Leon Tuey, often points this out in his ongoing analysis of market activity. He has been at this for longer than most analysts have been alive, so what he has to say is worth listening to. The breadth indicators, or measures of advancing issues versus declining issues and advancing volume versus declining volumes, will show the strength of the underlying market that prices alone do not. These measures are peeks into what investors are really doing with their money.

As we know, prices will wiggle back and forth and traders have to decide whether the last wiggle was the end of a price run or merely a pause in the longer trend. These indicators will give clues on whether to take action on bailing from a position or perhaps providing confidence to adding on during a period of weakness.

Let’s examine the breadth statistics of the major popular market averages; the Dow Jones, the Nasdaq, the S&P and as well, the small cap markets.

Advancing issues outpacing declining issues to a new high

Even as some of the market leaders have paused over the past few week, the underlying strength of the 30 Dow issues has pushed this indicator to a new high

Nasdaq breadth pushing new highs

While the Nasdaq has been the most stellar part of the stock markets, a few big cap names such as AAPL, NVDA, MSFT and AMZN have been responsible for much of the action. In fact as we can see from this breadth statistic, the broad swath of the Nasdaq markets are showing a strong advance.

Breadth on S&P showing enormous strength
Small caps to catch up?

We can observe that investors are pushing stocks to new highs with enthusiasm and not with the trepidation you would think from merely reading the daily narratives of the media. As Mr. Tuey notes, longer term trends will prevail as long as the fundamental support of a friendly fed leading to a friendly business and investment climate exists. The relative strength or weakness in equity prices reflect a discounting of this climate six to nine months into the future. Any short term fluctuations are emotional and news driven which give rise to analysis by technical swing indicators.

These statistics confirm the trending indicators I have written about and demonstrates that, notwithstanding angst about current political resolutions, there is a massive confidence vote on the outlook for the stock markets and by implication, the economy.

Past market experiences show that towards the latter part of an economic expansion, the materials and commodity sectors come to life as businesses create demand. As part of this activity, money will become more aggressive and move down the investment chain towards more aggressive and speculative companies. As noted in the last chart above, the AD statistic on smaller cap stocks have yet to make new highs as per the senior markets. I anticipate that this will change and thus smaller cap issues will be in favor in the months ahead.

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