Market breadth is the measure that reflects whether a major movement of the stock market is being accompanied by the set of market values or not.
We know that stock exchanges are made up of many listed companies. For example, the German Dax30 index is made up of 30 companies. The S&P 500 for 500 companies. And the Ibex 35 for 35 companies. In addition, each company or company has a weight in the composition of each index. Roughly, the most important companies, either by capitalization or by negotiated volume, will have more weight on the index. In such a way that while a company can represent 5% in the composition of an index, another can participate in only 0.5%. In this sense, a market can rise or fall due to the rise or fall of a few companies that represent a significant percentage.
Thus, from the perspective of market breadth, the really interesting thing is to see how many values rise and how many values fall regardless of their weight in the index. The relationship of values that rise and fall we call market breadth. Which constitutes a measure of the reliability of a movement.
Positive and negative market breadth
When talking about market breadth, reference is being made to the concept. However, from the practical point of view we must distinguish between positive market amplitude, negative market amplitude and neutral market amplitude.
- Positive market amplitude : The positive market amplitude occurs when the number of securities that rise is greater than the number of securities that fall. Assuming that an index or market is made up of 50 values, if 35 goes up and 15 goes down, the market width is positive.
- Negative market amplitude : The negative market amplitude occurs when the number of securities that fall is greater than the number of securities that rise. Assuming that an index or market is made up of 100 values, if 70 go down and 30 go up, the market amplitude is negative.
- Neutral market breadth: If the ratio of values that rise and fall is not substantially different we could say that we are facing a neutral situation. For example, a market consisting of 500 securities. Of which 260 rise and 240 fall. Although the number of values that go up is greater than those that go down, the most sensible thing would be to affirm that the market width is neutral. Since there is no substantial difference that allows us to affirm that the market as a whole is going up.
In any case, there is something much more important than the sign of market breadth. That is, the comparison between the movement of the index or market with the breadth of the market. The breadth of the market alone reveals incomplete information. Therefore, in order to analyze a market it is necessary to compare it.
Market Amplitude Indicators
Market amplitude indicators are tools that work with information regarding the values that rise and fall. The usefulness of these indicators lies in the simultaneous use with the market on which it is calculated. There are many indicators of market breadth, but the best known are: