The Breadth of the Market Is Indicated Best by These Key Metrics

Market breadth helps investors gauge the overall health of a stock market beyond index movements. While major indices like the S&P 500 or Nasdaq can be driven by a few large companies, breadth indicators reveal whether gains or losses are widespread. This provides insight into the strength behind market trends.

Several key metrics assess market breadth, offering different perspectives on participation and momentum.

Advance-Decline Line

The advance-decline line (A/D line) tracks the number of stocks rising versus those falling each day, creating a cumulative total over time. When more stocks advance than decline, the line moves upward, signaling broad participation in market gains. If the line trends downward while major indices rise, it suggests only a few large stocks are driving the rally.

This divergence can indicate weakening momentum. In late 2021, for example, the S&P 500 climbed while the A/D line declined, showing fewer stocks were participating in the rally. This foreshadowed the market downturn in early 2022. Traders watch for these discrepancies to determine whether an index’s movement is supported by broad participation or masking underlying weakness.

The A/D line can also signal potential reversals. If a market correction occurs but the A/D line starts improving before the index, it may suggest selling pressure is easing. In March 2020, for instance, the A/D line stabilized before the broader market rebounded from its pandemic-driven crash.

Up Volume vs. Down Volume

Analyzing the volume behind stock movements helps assess buying and selling pressure. Up volume represents shares traded on days when a stock or index closes higher, while down volume accounts for shares exchanged on down days. Comparing these figures over time reveals whether market rallies have strong participation or if declines are accelerating.

When up volume consistently exceeds down volume, it suggests buyers are in control. A strong bull market typically features rising prices accompanied by expanding up volume, as seen during the 2023 recovery from the previous year’s bear market.

Conversely, when down volume dominates, it signals increasing selling pressure. This often precedes market corrections. In late 2018, down volume overwhelmed up volume for several weeks, foreshadowing the sharp selloff that followed in December.

Counting New Highs vs. New Lows

Tracking the number of stocks reaching new highs versus those hitting new lows provides insight into market strength. A rising market with increasing new highs suggests broad participation, reinforcing the uptrend. However, if major indices climb while new highs stagnate, it indicates concentrated gains, a potential warning sign.

Periods of market instability often see new lows outpacing new highs, signaling increased downside risk. In early 2022, the S&P 500 remained near record levels while new lows steadily increased, reflecting growing weakness beneath the surface. Eventually, this deterioration led to a broader decline.

A shift in new highs after a downturn can indicate improving sentiment. In late 2022, as markets rebounded from a difficult year, new highs began outnumbering new lows, confirming a shift in momentum before broader indices reflected the recovery.

Industry Participation Metrics

Examining how different sectors contribute to market movements helps determine whether gains or losses are widespread or concentrated. A rally where multiple sectors—such as technology, healthcare, and industrials—advance together suggests strong participation. If only one or two industries drive index gains while others remain stagnant, the rally may be on weak footing.

Sector rotation also plays a role in market breadth. When investors shift capital from defensive industries like utilities and consumer staples into cyclical sectors such as financials and energy, it often signals increased risk appetite and economic optimism. In early 2023, investors moved out of high-dividend defensive stocks and into growth-oriented sectors, reflecting renewed confidence in economic expansion.

Divergences between sector performance and broader market trends can serve as warning signs. If economically sensitive industries, such as transportation and manufacturing, begin underperforming while major indices remain strong, it may indicate weakening fundamentals. In 2007, for example, transportation stocks declined months before the financial crisis unfolded.

Summation Index

The summation index, derived from the McClellan Oscillator, provides a broader view of market momentum by tracking cumulative changes in advancing and declining stocks. It helps identify sustained trends rather than short-term fluctuations.

A rising summation index suggests strengthening market participation, often preceding extended rallies. In mid-2020, the index turned upward before major benchmarks fully recovered from the pandemic-induced selloff. Conversely, a declining summation index signals weakening breadth, even if headline indices remain stable. In late 2021, the index trended downward despite the S&P 500 reaching new highs, foreshadowing the market downturn that followed.