Chinks In The Bull Market's Armor

Indicators of market breadth are often useful in confirming or telegraphing important trend changes in equity markets. In simple terms, indicators of market breadth measure the level of participation of individual stocks in the general trend of the market. At bear market lows, almost all stocks have been going down and readings like the percent of stocks in up-trends and the percent of stocks making new lows hit extremes. At these junctures, an improvement in market breadth (read fewer stocks participating in the bear market) is often an early sign that the worst of the decline has past. Conversely, market breadth indicators often start to deteriorate ahead of important intermediate and long-term highs even as the general trend in the market still appears to be strong. Large divergences between market breadth and stock prices is an early warning sign to market participants that all may not be well underneath the surface.