Investors are looking to the markets to deliver their portfolios to a new level of profitability, and the question of whether breadth conditions are screaming risk-on is being asked more than ever. With the stock market having returned to pre-pandemic highs and big-name companies finding opportunities to continue to grow and thrive, it’s important to examine the data to see if certain breadth conditions are signaling a warning about the near-term market outlook.
One of the biggest breadth indicators that investors use to gauge market risk is market breadth. This measure refers to the total number of stocks advancing against the total number of stocks declining. A high number of advances reflects buying pressure in the markets and is usually a good sign for bullish investors. Conversely, a rising number of decliners signals a bearish sentiment and could be a red flag for investors.
Market breadth is computed by taking the difference between advancing and declining issues. If the positive difference is greater than the negative difference, then this indicates an overbought market. Conversely, a negative difference tells us the market is oversold.
In the current market environment, investors are paying close attention to the NYSE Advance-Decline Line. This measure looks at the net number of stocks that are advancing and declining on the Big Board. A rising trend is considered a bullish sign while a falling trend is seen as an indication of bearishness.
Breadth oscillators are another important breadth indicator. These measure the strength of the advances and declines in the stock market and compare them to historical levels. A rising oscillator tells us that the market is getting stronger while a falling one signals weakening market momentum.
Ultimately, investors should pay close attention to breadth measures when making their buy or sell decisions. A rising number of stocks advancing tells us that buyers are in control and the market is likely to go higher. Conversely, a rising number of stocks declining signals that the bulls might be losing their grip. By keeping a close eye on these breadth conditions, investors can gain a better understanding of how the market might move in the near-term.
