Market Breadth Analysis Methodology

Market Breadth Analysis Methodology

Overview

Market breadth measures the degree of participation in a market move. A healthy advance is characterized by broad participation (many stocks rising), while a narrowing market (fewer stocks leading) often precedes corrections.

This methodology uses TraderMonty's breadth dataset to quantify market health across 6 dimensions, producing a composite score from 0 (critical) to 100 (maximum health).

Data Description

Breadth Index

The breadth index (0-1) measures the proportion of S&P 500 stocks trading above their 200-day moving average. Key derivatives:

• Raw: Daily breadth value (percentage of stocks above 200DMA)
• 8-day EMA (8MA): Short-term exponentially weighted moving average (fast signal)
• 200-day EMA (200MA): Long-term exponentially weighted moving average (trend filter)

Important: Both moving averages use EMA (Exponential Moving Average), not SMA. The source repository calculates them as ewm(span=N, adjust=False). EMA gives more weight to recent data points, making it more responsive to changes than SMA.

Key Thresholds

Signal Flags

• Breadth_200MA_Trend: 1 = 200MA rising (bullish regime), -1 = 200MA falling (bearish regime). Uses hysteresis with threshold=0.001 to prevent whipsaw signals.
• Bearish_Signal: Backtested signal combining trend and momentum deterioration
• Is_Peak / Is_Trough: Cyclical turning points detected using scipy.signal.find_peaks with distance=50, prominence=0.015 on the 200MA. This ensures at least 50 trading days (~10 weeks) between consecutive peaks/troughs and a minimum prominence of 0.015.
• Is_Trough_8MA_Below_04: Extreme trough marker detected with prominence=0.02 on inverted 8MA values below 0.4.

Pink Zone (Bearish Region)

The source repository's charts use a pink background to highlight the most dangerous market condition:

Pink Zone = (Breadth_200MA_Trend == -1) AND (8MA < 200MA)

This means the long-term trend is declining AND the short-term breadth has fallen below the long-term average. Historically, markets in the Pink Zone experience elevated volatility and downside risk. The Pink Zone is distinct from the Bearish_Signal flag - it is a structural condition that can persist for weeks or months.

Component Details

C1: Current Breadth Level & Trend (25%)

Rationale: The most direct measure of current market health. Higher 8MA means more stocks participating; uptrend in 200MA means the long-term structure is supportive.

Weighting within component:

• 8MA Level: 70% - immediate health snapshot
• 200MA Trend: 30% - longer-term regime confirmation

8MA Direction Modifier: A 5-day lookback on the 8MA itself adjusts the score based on the short-term direction of breadth. This ensures C1 considers not just the level, but whether breadth is accelerating or decelerating:

Key insight: An 8MA of 0.65 in an uptrend (score ~80) is healthier than 0.65 in a downtrend (score ~62), because the downtrend context suggests the level may be transient. The direction modifier further differentiates: a falling 8MA at 0.65 signals emerging weakness (-10), while a rising 8MA at the same level confirms strength.

C2: 8MA vs 200MA Crossover Dynamics (20%)

Rationale: The gap between fast and slow MAs reveals momentum. A wide positive gap means breadth is accelerating above trend; a negative gap means it's deteriorating below trend.

Direction modifier: When the 8MA is recovering (rising) while still below the 200MA, this early recovery signal adds +10. Conversely, when 8MA is falling while still above 200MA, this early deterioration signal subtracts -10.

Key insight: The crossover point (8MA crossing 200MA) is a significant signal. Bull markets maintain 8MA above 200MA; bear phases see 8MA below 200MA.

C3: Peak/Trough Cycle Position (20%)

Rationale: Breadth moves in cycles. Knowing whether we are in the early, middle, or late phase of a cycle helps calibrate expectations.

Cycle phases:

1. Trough → Early Recovery (0-20 days): Highest potential for upside if 8MA is rising
2. Sustained Recovery (21-60 days): Confirmed recovery with decreasing upside magnitude
3. Mature Recovery (60+ days): Late-cycle, watch for next peak
4. Post-Peak Decline (0-20 days): Highest risk period
5. Sustained Decline (21-60 days): Deep correction territory
6. Prolonged Decline (60+ days): Potential bottom formation if 8MA starts rising

Extreme trough bonus: When 8MA drops below 0.4 at a trough, history shows these are often excellent long-term entry points, warranting a +10 bonus.

C4: Bearish Signal Status (15%)

Rationale: The dataset includes a backtested bearish signal flag that combines multiple factors. Its value depends on context.

Interpretation matrix:

Context matters: A bearish signal when 8MA is above 0.50 is less concerning (+15 adjustment) than one when 8MA is below 0.25 (-5 adjustment).

Pink Zone integration: When in the Pink Zone (200MA downtrend + 8MA below 200MA) but without an active bearish signal, a -10 penalty is applied to reflect structural weakness that the bearish flag alone may not capture.

C5: Historical Percentile (10%)

Rationale: Knowing where current breadth stands relative to the full 10-year history provides framing. Is this level normal, unusually high, or unusually low?

Overheated/oversold adjustments: When current 8MA approaches the average peak level, a -10 penalty reflects elevated risk of mean reversion. When near the average trough level, a +10 bonus reflects contrarian opportunity.

C6: S&P 500 vs Breadth Divergence (10%)

Rationale: The most dangerous market condition is when the index makes new highs but breadth is declining (fewer stocks participating). This divergence preceded major tops in 2000, 2007, and 2021.

Multi-Window Analysis (20d + 60d): Divergence is measured at two time scales and combined:

• 60-day window (weight 60%): Captures structural, medium-term divergence
• 20-day window (weight 40%): Detects short-term emerging divergence

Composite score = 60d_score x 0.6 + 20d_score x 0.4

Early Warning flag: When the 20-day window shows bearish divergence (score <= 25) while the 60-day window is still healthy (score >= 50), an Early Warning is triggered. This signals that short-term breadth deterioration has begun before it becomes visible in the structural window.

Near-flat classification: When both S&P 500 change and breadth change are below noise thresholds (|S&P %| < 0.5 and |breadth change| < 0.01), the window is classified as "Near-flat (insufficient movement)" with a neutral score of 50. This prevents misclassification of trivial movements as divergence or alignment signals.

Key patterns (per window):

• S&P up + Breadth up: Healthy, sustainable rally (70)
• S&P up + Breadth down: Dangerous narrow market (10-25)
• S&P down + Breadth up: Bullish divergence, potential bottom (65-80)
• S&P down + Breadth down: Consistent decline, wait for stabilization (30)
• Both near-flat: Neutral (50) - insufficient movement to classify

Weight Redistribution

When a component has data_available: False (e.g., insufficient rows for divergence analysis), its weight is excluded and the remaining weights are proportionally redistributed:

effective_weight[i] = base_weight[i] / sum(base_weight[j] for all available j)

Example: If C6 (10%) is unavailable, the remaining 90% is redistributed:

• C1: 25/90 = 27.8%, C2: 20/90 = 22.2%, C3: 20/90 = 22.2%, C4: 15/90 = 16.7%, C5: 10/90 = 11.1%

Zero-division guard: If all components are unavailable, the composite score defaults to 50 with zone "Neutral" and a warning that the score is a reference value only.

Data Quality Labels:

Composite Score Interpretation

Zone Thresholds

Guidance Caution Warning

When the 8MA direction modifier is negative in C1 (Breadth Level & Trend) or C2 (MA Crossover), the report automatically appends a Caution warning to the Overall Assessment guidance. This alerts analysts that the zone-based guidance (e.g., "Normal operations") may be overly optimistic given the deteriorating short-term momentum.

The Caution warning also triggers additional protective actions in the Recommended Actions section:

• "Reduce new position sizes until 8MA stabilizes"
• "Tighten stop-loss levels on existing positions"

These are appended to the standard zone-based actions, not replacing them.

Cross-Referencing with Other Skills

• Market Top Detector: If breadth is Weakening (20-39) AND top detector is Orange/Red, this is strong confirmation of topping conditions.
• CANSLIM Screener: In Strong/Healthy zones, CANSLIM stock selections have higher success rates.
• Sector Analyst: Weakening breadth often coincides with rotation from offensive to defensive sectors.

Score History & Trend

The analyzer maintains a rolling history of composite scores to detect trend direction.

Storage format: JSON file (market_breadth_history.json) in the output directory, structured as an array of objects:

[
  {"data_date": "2025-06-10", "composite_score": 72.3, "component_scores": {"breadth_level_trend": 80, "ma_crossover": 70, "...": "..."}, "recorded_at": "2025-06-10 14:30:00"},
  {"data_date": "2025-06-11", "composite_score": 68.1, "component_scores": {"breadth_level_trend": 75, "ma_crossover": 65, "...": "..."}, "recorded_at": "2025-06-11 09:15:00"}
]

Key rules:

• Keyed by data date: Each entry uses the latest data row's date, not the analysis run date.
• Duplicate prevention: If an entry with the same date already exists, it is overwritten (no duplicates).
• Rolling window: Maximum 20 entries retained. When the limit is reached, the oldest entry is pruned first.
• Trend detection: The delta between the first and last score in the most recent N entries (default N=5) determines the trend label:
  • delta > 2 → "Improving"
  • delta < -2 → "Deteriorating"
  • -2 <= delta <= 2 → "Stable"

Usage in reports: The trend summary (direction, delta, entries) is included in both JSON and Markdown outputs, giving analysts a quick read on whether market breadth is accelerating or decelerating.

Historical Context

Average Values (from Summary CSV)

• Average Peak (200MA): ~0.729 - breadth cycles typically top around this level
• Average Trough (8MA < 0.4): ~0.232 - extreme troughs average around this level
• Peak Count: ~5 over 10 years (roughly every 2 years)
• Trough Count: ~10 extreme troughs (roughly twice per year on average)

Notable Historical Patterns

• COVID-19 (March 2020): 8MA crashed to extreme lows, followed by one of the sharpest breadth recoveries in history
• 2022 Bear Market: Sustained period of 8MA below 200MA with multiple bearish signals
• 2023 Recovery: Gradual breadth improvement with 8MA crossing above 200MA

Live Resources

• Interactive Dashboard: https://tradermonty.github.io/market-breadth-analysis/
• Data CSV: https://tradermonty.github.io/market-breadth-analysis/market_breadth_data.csv
• Summary CSV: https://tradermonty.github.io/market-breadth-analysis/market_breadth_summary.csv
• Source Repository: https://github.com/tradermonty/market-breadth-analysis

Data is automatically updated twice daily via GitHub Actions. CSV files are freely accessible without API keys.

Limitations

1. Lagging indicator: Breadth data reflects what has happened, not what will happen. Use alongside forward-looking indicators.
2. No sector granularity: The breadth index is market-wide. A few large sectors can dominate the reading.
3. CSV update frequency: Data depends on TraderMonty's update schedule. Check data freshness before analysis.
4. Single market: Covers S&P 500 only. Does not reflect international markets, small caps, or other asset classes.
5. No volume context: The breadth index is price-based and does not incorporate volume data.