In addition to following price levels of the major stock indices, we like to look at various measures of stock market breadth to get a feeling for the level of broad participation in rallies or declines. One way to measure breadth of a stock index is to compute the percentage of stocks that have made a new 52 week high (on a weekly closing basis) and compare it to the trend of the index in question. Generally speaking, we like to see new cyclical highs in an index confirmed by an expanding percent of stocks making new 52 week highs because this indicates broad participation in a rally.
As the chart below shows, market breadth peaked in late May of this year and has since failed to make a new high in each instance that the World Stock Index made a new cyclical high. This is symptomatic of a mature bull market where the continuing advance is being led by fewer and fewer stocks. Note that this is not a timing indicator because broad indexes can continue to advance for weeks or months while breadth deteriorates. But major divergences like the one seen below are consistent with aging bull markets where the preponderance of gains have already been made.
