Digging Below the Surface: Breadth

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We recently highlighted how all the good news seemed priced into the market. That, in turn, created the risk of any incremental developments triggering negative responses.

This has played out pretty much as expected since our post. There’s been good economic news, like 49-year lows in jobless claims and 14-year highs in manufacturing, but the market didn’t rally. Federal Reserve Chair Jerome Powell pretty much stuck to expectations in his first appearance before Congress. Interest rates and stocks both fell. Then, suddenly, a headline everyone expected on steel tariffs hammered sentiment yesterday.

On the surface this may seem like yet another fickle shift in the winds of sentiment. But customers using TradeStation’s powerful analysis tools may have seen red flags for the recent volatility months ago.

First, let’s consider breadth — the strength of all companies across the market. This indicator looks past the simple performance of a major index like the S&P 500 or Nasdaq-100, which can be dragged higher by a few big names. In fact, that is exactly what happened before the recent drop.

Perhaps the most common measure of breadth is the Advance-Decline line, which compares the number rising stocks against falling stocks. On TradeStation’s charts, enter the symbol $ADSPD for the S&P 500’s A/D line. A short-term daily view shows a lot of noise, so I switched to the monthly interval.

S&P 500 monthly Advance Decline Line

The chart above shows that breadth peaked in November and turned negative in December. Then when it rebounded in January, it was barely above the zero line — even though the broader S&P 500 shot to a new all-time high. Interestingly, we can also see the A/D line weakening before other big drops like August 2015 and October 2008.

Breadth isn’t foolproof, and it can provide potentially bearish before a drop actually occurs. But it’s another tool traders and investors may want to consider when studying the markets.

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