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Can the Stock Market Have Bad Breadth?

Posted in Technical Trading

Is market breadth a reliable indicator of future stock market returns? To investigate, we perform simple tests on four daily U.S. stock market breadth metrics:

  1. RSP-SPY - Total return for Guggenheim S&P 500 Equal Weight (RSP) minus total return for SPDR S&P 500 (SPY).
  2. NYSE A/D - Number of NYSE advancing stocks divided by number of NYSE declining stocks.
  3. NYSE Up/Down Volume - Volume for NYSE advancing stocks divided by volume of NYSE declining stocks.
  4. NYSE 52-Week Highs-Lows - Number of NYSE 52-week highs minus number of NYSE 52-week lows.

We use SPY as a proxy for the U.S. stock market. We use correlation tests that assume linear relationships between breadth metrics and future SPY returns and ranking tests that do not. Samples commence May 2003 (initial RSP availability) for the first three and late October 2005 for the fourth. Using daily dividend-adjusted levels of RSP and SPY and daily data for components of the other three breadth metrics from specified start dates through most of August 2017, we find that:

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