Street Talk: Look beyond just price, determine the market breadth, which is recently getting weaker

Market breadth is the underlying strength of the market that can somehow be blamed for the highs the market achieved not long ago. The underlying market health has been deteriorating lately and it seems like breadth is for real.

Market breadth turned negative from positive on August 13, this is bad considering that it indicates the overall health of the market.

The most common way to measure market breadth is the advance-decline line (AD Line). This can be measured in the New York Stock Exchange issues. It is based on net advances, which is the difference between the number of advancing stocks and the number of declining stocks. According to information gathered by Forbes, the AD Line is struggling and is worrisome, because it shows a lack of follow through for the stock market highs.

The NYSE new highs-new lows is another effective way to measure breadth. And upward trend needs confirmation by strength in this measurement. According to Forbes reports, the NYSE net new highs-new lows has been dropping since April. This is the same with the AD Line, which has been on a steady downward trend since April. The trends in the NYSE net new highs-new lows in April are almost identical as the fourth quarter of last year. This is not a good sign for the equity markets' internal strength and health.

Now that breadth is bad, people are worried. In the last few months, the bad breadth only meansthe market will go lower.

J.C. O'Hara, on the other hand writes that although bad breadth is a valid concern, stocks really just have been moving sideways and if it's sideways, the rule that markets must go lower in bad breadth does not necessarily hold true. He also made a note that in 1992, the sideways market on a bad breadth eventually made stocks go higher.