The Visual Investor: How to Spot Market Trends, Second Edition

CHAPTER 8

Market Breadth

The previous chapter showed that commodities were the strongest asset class going into 2007 and had been so for several years. That reality favored investments in commodities and stocks tied to those commodities (like energy and gold shares), which remained stock market leaders throughout 2007. In this chapter, we’re going to study the other side of the equation by looking at stock market groups that started to underperform the U.S. stock market during the second half of that year. At the same time, we’re going to study the negative impact those weak groups had on market breadth, which gave early warning signs that the stock market was peaking as 2007 drew to a close. We start by examining obvious warning signs in the most popular indicator of stock market breadth, which is the NYSE advance-decline line. Near the end of the chapter, you learn about other useful breadth indicators that show that the last market move into new highs during 2007 was on weak footing.

MEASURING MARKET BREADTH WITH NYSE AD LINE

Market breadth usually refers to the number of NYSE stocks that are rising versus those that are falling on any given day. If there are more advancing stocks than decliners, market breadth for that day is positive. More declines than advances translate into a negative breadth day. There are several ways to measure market breadth. The most popular is the NYSE advance-decline line. The AD line is simply a running cumulative total of advancing stocks minus ...