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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.

IBD Industry Groups Bell Curve – Bullish Percent

The IBD Industry Groups Bell Curve – Bullish Percent average distribution declined by a further -4.88% since the previous week, with 16 groups dropping out of the Stage 2 zone and 21 groups dropping back into the Stage 4 zone...
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Stock Market Update and US Stocks Watchlist – 23 August 2022

The major indexes, i.e. the S&P 500, Nasdaq, Russell 2000 etc, all continued to pullback today with a weak failed attempt to regain the 21 day EMA and then poor close near the bottom of the daily candle. So all had a second daily close below the 21 day EMA and the short-term market breadth indicators, such as the S&P 500 percentage of stocks above their 20 day EMA (which can be seen in the top chart), continued lower also and closed at 38.60%.
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IBD Industry Groups Bell Curve – Bullish Percent

The IBD Industry Groups Bell Curve – Bullish Percent average distribution declining by -0.11% since the previous week, with 3 groups dropping out of the Stage 2 zone and one group dropping back into the Stage 4 zone. But the overall average remains slightly above the mid point of the bell curve, which is the Stage 1 zone when rising from the lower Stage 4 zone.
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Stage Analysis Members Midweek Video – 17 August 2022 (1hr 25mins)

This weeks midweek video starts with a feature on the IBD Industry Group Bullish Percent Index, which I highlighted in the blog post on Tuesday. So I wanted to do a deeper discussion on the comparative periods from the chart to show the type of market behaviour that came next during each of the previous periods.
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IBD Industry Groups Bell Curve – Bullish Percent

The IBD Industry Groups Bell Curve – Bullish Percent continued to improve over the last week, crossing the mid point of the bell curve and pushing further into the Stage 1 zone (40% to 60% range). With an additional 9.5% of groups leaving the Stage 4 zone (below 40%).
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