Why the quality of the stock rally has improved
Crummy market breadth is no longer a source of market concern.
To the contrary, breadth finally looks healthy -- very healthy, in fact -- and is finally confirming the strength of the rally.
As a refresher, breadth measures attempt to gauge the number of stocks that are taking part in a market move higher or lower. A trend with a lot of breadth is considered to be a lot more reliable than a trend without it.
Market breadth can also help identify market turning points. Breadth that is moving in the opposite direction of a stock market trend can sometimes come ahead of a change in price direction.
The number of stocks making new highs and/or new lows is one of the most common breadth measures.
In the chart above, the S&P 500 is in red and black above, and the number of stocks making new highs relative to new lows is the black line at the bottom.
Starting in February, breadth began to make a series of lower highs, even though stocks kept moving higher. It was one reason to question the quality of the ongoing rally.
As it turned out, the declining breadth provided an early warning about the selloff in May.
There was a similar phenomenon in July. Breadth began to make a series of lower highs as the S&P 500 kept chugging higher. It looked like a potential case of deja vu.
Then about a week ago, just ahead of the QE3 announcement, breadth managed to make a higher high, finally confirming the S&P 500's move.
Now, a broad number of stocks are now making new highs, not just a handful of them. And that helps make what was a questionable rally just a few weeks ago a higher-quality one.
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