I found an interesting article online (click here for the original story) that I would like to share with you as I believe we’ll become smarter after reading it and taking it into account when trading.
Investopedia explains Market Breadth:
`Positive market breadth occurs when more companies are moving higher than are moving lower, and it is used to suggest that the bulls are in control of the momentum. Conversely, a disproportional number of declining securities is used to confirm bearish momentum.
A large number of advancing issues is a sign of bullish market sentiment and is used to confirm a broad market uptrend. Traders will specifically look at the number of companies that have created a 52-week high relative to the number that created a 52-week low because this data can provide longer term information about whether the bullish or bearish trend will continue`.
The charts below represent one variable to show Market Breadth, in this case for the Nasdaq, which just hit new All Time Highs, mainly explained due to the performance of Google. The red line in the 1st chart shows the performance of the Nasdaq if every stock in that index would have an equal weight.
Now, if history is any guide for the future, then we should be careful chasing the new highs in the Nasdaq. Don´t get me wrong, I´m not saying markets can’t go higher or should crash right now, but it should make you humble and you should take care of a decent risk management if you play the long side.
For me, this is general knowledge, so if you don´t understand my explanation or you would like to discuss it more into detail, feel free to ask it here and we´re happy to help you!
Enjoy the weekend!