Looking at the S&P 500 alone tells you only part of the story. A market index can rise while most stocks are falling, or it can decline while the majority of stocks are actually healthy. Market internals, also known as breadth indicators, reveal what is happening beneath the surface and help you make better trading decisions.
What Are Market Internals?
Market internals are indicators that measure the participation and health of the broad market. Instead of looking at a price-weighted or market-cap-weighted index, breadth analysis looks at how many individual stocks are advancing, declining, making new highs, or trading above key moving averages.
Key Insight: Strong markets have broad participation. When the index rises but fewer stocks participate, it signals weakness. When the index falls but most stocks hold up, it signals underlying strength.
The Advance-Decline Line
The advance-decline line is the most fundamental breadth indicator. It is a cumulative measure of advancing stocks minus declining stocks each day. The NYSE advance-decline line is most commonly used, but you can also track it for the S&P 500 or NASDAQ.
How to Read the A/D Line
- Rising A/D line with rising index: Healthy bull market with broad participation
- Falling A/D line with rising index: Bearish divergence warning, rally is narrowing
- Rising A/D line with falling index: Bullish divergence, underlying strength
- Falling A/D line with falling index: Confirmed downtrend, broad weakness
Historical Example
Before the 2021-2022 market top, the advance-decline line began diverging from the S&P 500 months in advance. While mega-cap tech stocks like Apple and Microsoft kept pushing the index higher, the majority of stocks had already started declining. Traders who watched breadth saw the warning signs early.
New Highs and New Lows
The new high/new low indicator tracks how many stocks are making 52-week highs versus 52-week lows. This is a powerful gauge of market strength because stocks at new highs represent momentum leadership, while stocks at new lows represent distress.
Interpreting New Highs/New Lows
- Expanding new highs: Bull market is broadening, healthy trend
- Shrinking new highs while index rises: Fewer leaders, rally losing steam
- Expanding new lows: Bear market conditions, widespread selling
- New lows contracting while index falls: Selling exhaustion, potential bottom
A common threshold is watching whether new highs exceed new lows. When the market consistently has more new highs than new lows, the path of least resistance is higher. When new lows dominate, be defensive.
Percentage of Stocks Above Moving Averages
This indicator shows what percentage of stocks are trading above key moving averages like the 50-day or 200-day MA. It provides a quick snapshot of how many stocks are in uptrends versus downtrends.
Key Thresholds
- Above 80%: Extremely overbought, potential short-term pullback
- 60-80%: Healthy bull market conditions
- 40-60%: Neutral, mixed market
- 20-40%: Weak market, bear market conditions
- Below 20%: Extremely oversold, potential bounce
Trading Tip: When the percentage of stocks above the 200-day MA drops below 20%, it often marks intermediate-term lows. These readings are rare and typically present buying opportunities for patient investors.
The McClellan Oscillator
The McClellan Oscillator is a momentum indicator based on the difference between exponential moving averages of advancing and declining issues. It oscillates around zero and helps identify overbought and oversold conditions as well as thrust signals.
Using the McClellan Oscillator
- Positive readings: More advances than declines, bullish momentum
- Negative readings: More declines than advances, bearish momentum
- Extreme highs (above +100): Breadth thrust, often marks start of rallies
- Extreme lows (below -100): Panic selling, often near lows
Breadth thrusts, where the McClellan Oscillator spikes above +100, have historically been reliable signals that a new uptrend is beginning. These occur when the market transitions from oversold conditions to strong buying.
Sector Participation Analysis
Not all sectors participate equally in market moves. Understanding which sectors are leading and lagging provides insight into market character and potential rotation opportunities.
Sector Breadth Indicators
- Offensive sectors leading: Technology, Consumer Discretionary, Industrials - risk-on environment
- Defensive sectors leading: Utilities, Consumer Staples, Healthcare - risk-off environment
- Financials leading: Often signals economic optimism, yield curve expectations
- Energy leading: Inflation concerns, commodity demand
Rotation Clue
When defensive sectors start outperforming while the index is still near highs, it often foreshadows a broader market decline. Smart money rotates to safety before the selloff becomes obvious.
Volume Breadth
Volume breadth indicators measure whether volume is flowing into advancing stocks or declining stocks. Up volume versus down volume provides conviction behind price moves.
Up/Down Volume Ratio
- Up volume greater than 90%: Buying climax, strong thrust day
- Down volume greater than 90%: Selling climax, panic day
- Persistent up volume dominance: Healthy accumulation
- Persistent down volume dominance: Distribution phase
Days with 90% or greater up volume are called breadth thrust days. Multiple thrust days in a short period often mark the beginning of new bull markets or significant rallies.
Building a Breadth Dashboard
Professional traders monitor multiple breadth indicators together to form a complete picture. Here is a framework for building your own breadth dashboard:
Daily Checklist
- Advance-decline line trend and divergences
- New highs versus new lows count
- Percentage of stocks above 50-day and 200-day MA
- McClellan Oscillator reading
- Up/down volume ratio
- Sector performance ranking
Track Your Trading Performance
Pro Trader Dashboard helps you analyze your trades against market conditions to understand when your strategies work best.
Breadth Divergences: Early Warning Signals
The most valuable use of breadth analysis is identifying divergences between price and breadth. These divergences often precede major market turns by weeks or months.
Bearish Divergence Warning Signs
- Index makes new high but A/D line does not
- Fewer stocks making new 52-week highs
- Percentage above 50-day MA declining while index rises
- Sector leadership narrowing to just a few names
Bullish Divergence Warning Signs
- Index makes new low but A/D line holds higher
- New lows contracting despite index weakness
- Breadth improving before price confirms
- Defensive sectors starting to underperform
Common Mistakes to Avoid
- Ignoring breadth in strong trends: Breadth divergences can persist, use them as warnings not signals
- Looking at only one indicator: Use multiple breadth measures for confirmation
- Overreacting to single-day readings: Look for trends and patterns in breadth
- Confusing breadth with price prediction: Breadth measures health, not direction
Summary
Market internals and breadth analysis provide crucial insight into market health that price indexes alone cannot reveal. By monitoring the advance-decline line, new highs and lows, percentage of stocks above moving averages, and sector participation, you can identify divergences and potential turning points before they become obvious. Make breadth analysis a regular part of your market review process to stay ahead of major market moves.
Learn more about volume analysis or explore sector strength analysis for deeper market insights.