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Matt's Market Insights


Why are market breadth indicators important to watch?


I'm guessing many of you know the answer to this question like the back of your hand. But for those who need a reminder, it's because market breadth indicators represent a way to glean information that is unavailable from looking at the performance of averages such as the Dow, Transports or S&P 500.


Indexes, through the nature of their construction, do not treat all stocks equally. The Dow, for example, which is a price-weighted index, allocates more "weight" to higher priced stocks. The S&P 500, which is a market-cap weighted index, allocates more "weight" to stocks with higher market caps (share price x shares outstanding). Nearly all commonly referenced indexes are one of these two types. Japan's Nikkei is price-weighted while the entire Russell family of indexes, the NASDAQ, Wilshire, Hang-Seng, and EAFE indexes are all "cap-weighted."


Market breadth indicators, on the other hand, treat all ... Log in or subscribe to continue reading.

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