Saturday, December 03, 2005

Does Breadth Really Matter?

From January, 2003 to the present, daily advance-decline figures have correlated very highly with price change: about .80. So does breadth really matter, or should we just focus on price?

Our outlook for the week ahead might depend on the answer to that question. The change in the S&P 500 Index over the past six days has been almost zero (.o4%). Advances have led declines over that same period, however, by over 2000 issues--something that has only happened four previous times since 2003.

It turns out that we've had 26 flat six-day periods since 2003, where SPX has been up less than .10% and down by less than -.10%. On average, six days later, the market has been up 16 times, down 10, for an average gain of .02%. No edge there.

If, however, we divide the sample in half (median split) and analyze the 13 strongest breadth flat markets vs. the 13 weakest breadth flat markets, a pattern emerges. The strongest breadth markets averaged a gain of .32% six days later (10 occasions up, 3 down); the weakest breadth markets averaged a loss of -.25% (6 occasions up, 7 down). It turns out that what individual stocks are doing while the large cap average is churning is important. This is what we'd expect if small and midcap stocks tend to lead the large caps.

That has to be rated a modest plus for this coming week. Since 2003, whenever we've had a flat SPX and advances leading declines by more than 1500 issues (N = 6), the market has been up six days later.

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