InvestorQ : What are some important I must remember as a trader about market breadth?
priya Shah made post

What are some important I must remember as a trader about market breadth?

Ayushi Kampani answered.
3 years ago

Market breadth improving on the back of high delivery volumes is a more definitive indicator than a case of market breadth improving on the back of intraday volumes. Intraday trading, being speculative in nature, do not send a credible signal about the buying interest in a stock.

Market breadth has the tendency to be extremely volatile. During market peaks, the market breadth can shift quite suddenly from positive to negative. Distinguishing a real breadth shift from a fake breadth shift is a fairly difficult task as most indicators in both the cases may look fairly similar. That is where the trend of the shift can give you useful cues. When it comes to market breadth, focus on the trend rather than on the absolute numbers.

Market breadth is one of the lead indicators of the market and not necessarily conclusive. The trend in market breadth has to be understood in sync with other more fundamental and technical factors. In isolation, this metrics can be quite misleading. This is critical and you must use this as a multiple regression model. There are a lot of other factors involved too and this is just one of the factors that give you a hint.

While understanding market breadth, look at two sub-factors. Firstly look at whether non-F&O segment is showing an improvement in market breadth. Secondly, also look at whether the Trade-to-Trade segment is showing better breadth. Since this is a non-speculative segment, it is more reliable. As you are aware, the T2T segment only accepts delivery buy and delivery sell orders. Hence there is not speculative element in T2T volumes.

Market breadth is highly sensitive to changes in regulation. Look at two famous examples. In 2005 when SEBI launched the inquiry into penny stocks, the breadth suddenly turned negative. Similarly, in 2009 when the pledged shares data was shared, the breadth suddenly turned negative. These are just 2 isolated instances. But we have seen quite often that these kinds of regulatory announcements can have a big impact. In fact, even in 2018 when SEBI announced the Additional Special Margins (ASM) on most mid cap stocks, the breadth of the market suddenly turned into negative territory which later pulled the markets also down.

Finally, also try to evaluate market breadth with respect to institutional versus retail participation. More often than not, institutional buying interest reflects a blanket allocation from a macro perspective. It is not exactly an indicator of the breadth of market. A retail-driven breadth is more reliable.