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Market Breadth

“If I could impress on you one fact, it would be that at least 75 percent of the risk in any stock is associated with the market and sector. If the overall market is not supporting higher prices, very few stocks you own, if any, will do well.”
Thomas J. Dorsey – Point and Figure Charting

Being able to identify the four Stages visually on individual stock charts is a crucial skill when using the Stage Analysis method. However, the major stock market index charts, such as the S&P 500, the Dow Jones Industrial Average, and the Nasdaq 100, are all just averages of the stocks within them, and are also distorted by the weighting of stocks.

For example, currently the top 10 stocks in the Nasdaq 100, make up 54% of the weighting. So over half of the Nasdaq 100s price action is determined by just 10% of the stocks. Therefore, you could have a scenario where 90% of stocks in the index are in Stage 4 declines, but the index chart could still look reasonably healthy in Stage 2, as the top 10 stocks are still in Stage 2 advances and holding the index up.

This is where market breadth indicators come into play. As they give you an unbiased look at what’s really going on under the surface of the stock market, and so can help you to determine the actual Stage that the market index is in.

There are many different data sources that you can use to get market breadth information, and each have their own strengths and weaknesses. But in the Stage Analysis method, no market breadth information is used in isolation. Instead, we use what is known as the Weight of Evidence approach, where all of the different market breadth information is combined to determine the overall strategy that should be used, and so can help you to determine whether you should be using a more cautious strategy or a more aggressive one.

Stan Weinstein was famous for using over 50 different indicators to determine the Weight of Evidence. But retail investors shouldn’t be put off, as you can achieve a similar effect by using a much smaller, core set of market breadth indicators, to create your own Weight of Evidence.

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Does a New Uptrend in the Unemployment Rate Mean That a Bear Market Is Just Getting Started?

Many of the short term market breadth indicators continued to gain strength and multiple are now on bullish signals. However, the medium and longer term signals mostly remain on bearish signals, with some struggling to make much headway from their extreme low levels such as the NYSE percentage of stocks above their 150 day moving averages and the cumulative new highs new lows for example.
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US MARKET BREADTH: Some People Say the Stock Market Has Bottomed – But Has It?

The stock market saw another week of heavy selling, taking multiple indexes down to extreme levels, with liquidation type selling across the board, even in previous safe havens such as treasuries and spot gold. Although there was some respite with a strong relief rally on Friday at the end of the day, recovering around 10% in some of the major indexes.
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