Regardless of whether stocks rally or decline, looking beneath the surface at market breadth helps to confirm the market’s direction.  When equities rally you want to see broad participation among individual stocks.  When the market rallies and participation among individual stocks narrows, it usually indicates a weaker foundation.  Technicians measure breadth in several different ways, but one of the most popular is the Cumulative A/D Line.  For those who are unfamiliar with the term, the A/D line measures the difference between the number of stocks in a given index that finish up on the day versus the number that declined.  Adding the net daily readings together gives you a cumulative total.  With stocks off their highs from late February/early March, we wanted to check on breadth for two things.  First, when the S&P 500 hit its high, did the cumulative A/D line confirm the rally?  Secondly, as stocks pull back, is breadth deteriorating?

The chart below compares the S&P 500 (blue line, left axis) over the last year to its cumulative A/D line (red line, right axis).  As shown, the two have tracked each other step for step in the last year indicating that breadth has confirmed price action.  This trend also remained in place when the S&P 500 hit its most recent high a few weeks back, and the cumulative A/D line followed suit.  As the S&P 500 has pulled back in the last several trading days, breadth has also pulled back, but nowhere near any degree suggesting a weaker market beneath the surface.  In fact, you could argue that underlying breadth has held up better than the S&P 500.  Relative to its range in the last 52-weeks, the S&P 500 is currently trading in the 85th percentile of its high/low range, whereas the cumulative A/D line is in the 89th percentile of its high/low range.  It’s only a minor difference, but it’s better than the other way around.

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