Financial Advice for Retirement, Social Security, IRAs and Estate Planning

Worry About a Narrow Market

June 15, 2017

It is the nature of capitalization-weighted indexes that a few large companies dominate the returns for the index. This becomes especially pronounced after long bullish runs. So, these days we hear a lot of talk about five to 10 stocks deceiving investors about the nature of the market.

There’s some truth to that idea. But you have to look beyond the capitalization-weighted indexes to see what’s really happening in the markets. To that end, I’m linking to a couple of commentaries that point you in the right direction. Take a look at this and this.

There is, however, another indicator that we can look at to gauge the market’s health. Market breadth is a simple ratio that looks at the number of advancing stocks versus the number of declining ones.

Let’s assume the advance-decline line is 1,000. If the next day there are 350 stocks that rise and 150 that fall, then it would net out at 200 and the next reading would be 1,200. If more stocks are consistently falling than rising, then the advance-decline line would be falling, and if more stocks are consistently rising than falling, then the advance-decline line would be rising.

During rising stock markets you can use an indicator like the advance-decline line to confirm that the uptrend is still in place.

 

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