Bad Breadth

Through the hour glass I saw you
In time you slipped away
--Berlin

Breadth assesses the degree to which all stocks are participating in an advance. If all 500 issues advance as the S&P 500 index climbs higher, then breadth is strong. This is considered bullish.

Shouldn't market advances always be associated with strong breadth? In a word, no.

Because equity indexes are usually market cap weighted, it is possible that price increases in just a few mega cap stocks can pull indexes higher even when most stocks are declining in value.

John Hussman notes that we're seeing just this phenomenon currently in US equity markets. For example, the NASDAQ composite has been recently marking new highs, but these increases have been due to just a few large issues such as GOOG climbing higher. When the index value is recalculated so that the price movements of each of the 1000 stocks in the index are weighted equally, then the NASDAQ has been falling sharply.

As Dr J observes, index increases on narrowing breadth are considered bearish, as optimistic investors pile into fewer and fewer stocks that are 'working' in order to keep their successful trend following winning streaks alive.

Advances on narrowing breadth are associated with most major stock market tops.

position in SPX