The drones on CNBC continue to talk about breadth seemingly without any understanding of what they are talking about. Bob Pisani continues to impress upon his viewers his wisdom with such gold nuggets such as, "Some traders think breadth is bad, others don't (I paraphrase here but you get the idea)." The reason breadth is important is breadth can tell you how far along a trend is. During market bottoms most stocks are participating as selling climaxes. Tops in the stock market on the other hand tend to be much more rounded; fewer and fewer issues participate as hope dissipates and buying power is exhausted. So when the market average starts move higher with fewer stocks participating, that can be an indication of an upcoming correction, even top.
I've posted several charts here of the McClellan Oscillator and Summation Index, some of my favorite studies to look at, and very predictive in my opinion. The divergences that I've pointed out continue, and while the indicators could always turn and reconfirm the uptrend, that just seems beyond what is possible in my experience.
Chart 1: McClellan Studies
The McClellan studies continue to show that momentum in breadth actually peaked months ago, and there are multiple divergence at both large and small degrees. Another way to visualize the breadth of the market is too look at the absolute breadth index, which is the percent change in the absolute difference between advancing and declining issues.
Chart 2: Absolute Breadth Index vs SPY
As I mentioned, lulls in breadth tend to happen near corrections. I've added bands that represent 2 standard deviations from the 200 day mean. We can see from the chart that every time breadth dropped below 2 standard deviations from the mean, short term tops followed almost immediately. Not only has the indicator dropped to that level, and has fallen further than previous drops, but also occurred concurrently with a host of other technical indicators indicating a correction is near.
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