Here's a different take on breadth (from Telechart 2000)
Tips & Hints (Thursday, September 9, 1999, 4:00 P.M.)
TIP: Breadth Is Only as Bad as It Smells
In recent years the advance/decline line has come to be regarded as synonymous with “market breadth.” Breadth refers to the number of stocks participating in a move displayed by popular averages, such as the Dow or the S&P 500. Needless to say, averages are subject to distortion. One or two stocks could carry the Dow Industrials up while the majority languished. So the concept of market breadth has great statistical value. You could say breadth keeps the averages honest.
However, we have long realized that the advance/decline line is not a trustworthy gauge of breadth. It is one of those crude indicators that originated early in the century, long before computers. It was a quick and dirty way of gauging breadth. It is still quick and dirty, but it has picked up imagined magic powers from decade to decade. We look at it the same way we look at old manual typewriters that some people insist on using. Or windup watches. They aren't necessary. We wear a solar-powered watch that cost a couple of hundred bucks.
The advance-decline line (T2100) has been in a steady downtrend since the market topped in April of 1998. However, according to the averages, the market bottomed in October and has gone on to majestic new highs. Which is right? The averages, always under suspicion, or the rustic but arcane advance-decline line, which carries an aura of sophistication about it?
We can tell you flat out with no hedging that the advance-decline line is full of hooey. We have been working lately with a universe of 3186 common stocks. We used an EasyScan to put them together. To be in the list they have to be above 5, have a market cap of at least $100 million and annual sales of at least $100 million.
And here is what we found. Since the April 1998 top, 75 percent of these 3186 stocks have gone on to match or exceed that top. Seventy-four percent exceed it. The contention that the market has bad breadth is simply incorrect. |
