1. Introduction to Market Breadth

When thinking of Market Breadth, one adage seems fit – “A Raising Tide Lifts All Boats”. Perhaps this single adage is enough to explain the concept of Market Breadth to a 10-year-old kid.

If asked how is the market doing today, one would simply look at Nifty50 Index and if it is in green, they would say market is doing good today and if it is in red, they would say market is doing bad today.

And if somebody asks their view on Nifty50, will it go up or will it come down? Then one would use their Technical Analysis tools to look at chart pattern formations, momentum indicators, volatility indicators, moving averages, open interest and more to establish their view of what Nifty50 is likely to do in the coming days.

If they have a bullish view on Nifty50, then the further doubts could be, is that bullishness because of few stocks, or is it that all the stocks in that index are bullish, if so, then how strongly bullish, or bearish those stocks are. These questions could be answered with the help of breadth analysis. There are many ways and methods of analysing breadth.

Breadth analysis can be done for a specific Index like broad, sectoral, industry group or for the whole market, the simple reason behind breadth analysis is, let’s say if there’s a car which is made up of poor quality parts then the reliability and durability of that car is a question mark, whereas if the same car is made up of high-quality parts, then one shall assume that it is a good car. The same logic goes for breadth analysis, if every individual constituent of an index is strong then the respective index is considered strong.

The Important part here is, when it comes to indices, they do get rebalanced periodically, meaning, the underlying constituents of an index get replaced periodically based on the criteria set for the respective index. For example, considering Nifty50, it is rebalanced once in six months, meaning that the 50 stocks which represent Nifty50 basket get changed.

So, when applying any Breadth indicator to any index, it tells you only the current picture of the current constituents of the index, historical constituents are not considered for breadth calculation, because they are no longer a part of the index. Traders should keep this information at the back of their mind while applying any breadth indicator to any index.

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