Gauging Market Direction With Market Breadth Data
The goal of fundamental investing is to find companies that will be able to generate increasing earnings and dividends over time which, in turn, will power share prices upward. However, as we know, stock prices do not exist in a vacuum. Most of us have probably spent a good amount of time researching what we consider to be the “perfect” stock, only to see its price fall after we have bought it. This is because the overall market trend has a tremendous impact on individual share prices. Therefore, having an idea of where the market is headed can be beneficial to your investing success.
While indexes such as the S&P 500 index garner a lot of attention in the financial press, the movements of many stocks are not captured by any market index. Therefore, many technicians and traders follow market breadth indicators to get a feel for how widely the full range of stocks is participating in the movement of the market.
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Market breadth indicators are the aggregate of data from multiple stocks and are used to determine whether the market is in an uptrend or downtrend or is moving sideways as well as to identify market tops or bottoms.
Advancing & Declining Issues
As mentioned, most market indexes only capture a small segment of the stock universe. The S&P 500 tracks the 500 largest U.S. companies, while the Dow Jones industrial average is made up of only 30 companies. Knowing that these indexes are up or down on a given day does not give us an idea of how broad-based the move is—whether the majority of stocks moved in the same direction as the index. Advance/decline data is useful in interpreting the overall breadth of the market.
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