InvestorQ : Are there any accepted measures of market breadth for traders and investors?
priya Shah made post

Are there any accepted measures of market breadth for traders and investors?

Mahima Roy answered.
3 years ago

There are various measures to gauge the breadth of the market. Among the more popular ones are the likes of A/D ratio and the new high ratio. Again these are indicative but they broadly give an idea of whether the rally or the fall in the markets is sustainable or not.

Firstly you must look at the A/D ratio or the advance / decline ratio. It is the ratio of stocks rose on a day versus the stocks that fell during the day. Number of stocks advancing versus number of stocks declining is a classic giveaway. You can just look at the A/D trend over a period of time and judge whether a particular trend is gathering steam or faltering. Again, A/D ratio at a point of time says nothing. You can only catch trends if you look at the A/D ratio over a period of time. In fact, they are useful in identifying turnarounds in the market.

Check where the new highs and the new lows in the market are getting concentrated. This is again a classic giveaway. If the new highs and new lows are concentrated in one sector or theme, it is not a broad-based market. In a broad market, you find stocks across the board making news highs or lows. You will generally find that in long term bull markets, the new highs are found across sectors and themes.

Mid cap indices and small cap indices tell you a lot more about the breadth of the market as compared to large cap indices like the Nifty and the Sensex. Probably, the most irrefutable evidence of a broad based market is the participation of mid-caps. Rarely has a bull market of large cap stocks alone, sustained for too long. Mid cap participation is a must to lend credence. Real market strength is always backed by breadth. A narrow market is generally not a sustainable scenario.