An indicator that calculates for each trading day the net advances or declines in stocks on an exchange. A strong market exists when there are net advances; a weak market exists when there are net declines. Of course, the magnitude of strength depends on how much advancing issues outnumber declining ones. On the other hand, if declining stocks outnumber advancing stocks by 3 to 1, market weakness is significant. The index is computed as follows:

Breadth index= net advances or declines/ number of securities traded

For example, if net advancing issues are 250 and securities traded are 2,100, then:

Breadth index = (250/2,100) = + 0.119

Higher positive readings mean more stocks are increasing in price relative to those decreasing. The breadth index focuses on change rather than level (volume). It is typically compared to popular market averages such as the S&P 500. It can also be contrasted with a base year or included in a 150-day moving average. The investor is interested in market direction to identify strength or weakness. Advances and declines usually follow in the same direction as standard market averages (e.g., Standard and Poor’s 500 Index and the Dow Jones Industrial Average). However, they may go in the opposite direction at a market peak or bottom. The investor can be confident of market strength when the Breadth Index and a standard market index are increasing. Securities may be bought because a bull market is indicated. If the indexes are decreasing, market weakness is indicated. Securities should not be bought in a bear market. In fact, securities held should be sold.