EC Market Trend Analysis By Comparing Equal Weight To Market Weight Indexes

  • Breadth of trend participation within an index is an indication of trend strength
  • Ratio of equal weight index to market-cap weight index prices is an indication of breadth
  • Broad Russell, S&P and NASDAQ indexes are in uptrends, but the underlying breadth is not highly supportive of continuation
  • Healthcare and Consumer Staples have best up trend confirmation from equal weight to market-cap weight breadth indicator
  • Energy has best down trend confirmation from equal weight to market-cap weight breadth indicator

As a generality, a healthy stock market up trend has broad participation in the trend by a large or increasing portion of its constituents; and conversely an unhealthy market has a low or declining portion of it constituents participating in an up trend.  That can be logic referred to as breadth analysis.

Broad or increasing breadth indicates a strong or strengthening market, while narrow or decreasing breadth indicates a weak or weakening market.

There a variety of ways to get at the question of breadth, such as studies of new highs and lows, price advances and declines, volume advances and declines, percentages of index members above selected moving averages, percentages of members with Bullish Point & Figure charts, and some others.

Equal Weight Indexes Indicate Breadth:

In this article, we look at the relative performance of equal weight versions of indexes, versus the primary  market-cap weighted versions of indexes.

Market-cap weighted indexes  heavily reflect the price action of the largest constituents (e.g. Apple is 4% of the S&P 500), while equal weight indexes treat all constituents the same (e.g. Apple is 1/5th of 1%% of the equal weight S&P 500).  Therefore, market-cap weighted indexes mask the underlying strength of the broad membership of an index.

It is probably safe to say this about rising market-cap weighted indexes:

  • if market-weight index is rising, and the equal weight index is roughly tracking the market weight index, the trend is stable.
  • if the market-weight index is rising, and the equal weight index rising, the up trend is strengthening
  • if the market-weight index is rising, and the equal weight index is falling, the up trend is weakening
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