Investing with the Trend: A Rules-based Approach to Money Management

Appendix CMarket Breadth

In 2006 McGraw-Hill published my book, The Complete Guide to Market Breadth Indicators. Breadth was an area I had spent a great deal of time on over the past 30-plus years. Breadth was almost totally ignored by the technical analysis community as most of the popular books on technical analysis usually only devoted a chapter to the subject of breadth. The book was in actuality a giant research project for me, one that took well over a year to complete even though I had been collecting breadth data and information since the 1980s. I tried to include every known breadth indicator or relationship in existence. I think I almost did that. The information following is from that book, and what I feel is the absolute most important part of the book. Enjoy!

Why Breadth?

• It takes advantage of inefficient markets. If investors are irrational and prone to excessive optimism with the latest hot stocks and excessive pessimism with those issues that have suffered recently, then market capitalization weighting reflects those inefficiencies from its very definition of shares times price. Breadth, which is equal weighted, does not have that problem.
• Avoid heavy concentration into a few stocks. Market capitalization weighting often causes a large portion of a portfolio to be concentrated in only a few issues—concentration risk. Breadth totally avoids this.
• Get more exposure to small capitalization stocks. Merely by the concept of capitalization weighting, small stocks ...