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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