Level 1 — Lesson 2 of 6 ⏱ 5 min read

Is the rally real —
or is it just a few stocks?

The S&P 500 can be up 1% while 70% of its stocks are actually falling. When that happens, the index is lying to you. Market breadth cuts through that noise.

⚡ 30-second answer

Market breadth measures how many stocks are participating in a move. A rally with broad participation (most stocks rising) is healthy and likely to continue. A rally carried by only a handful of large-cap names is fragile and prone to sudden reversals. Check breadth before you trade to know which one you are in.

Why the index number alone is not enough

The S&P 500 is a market-cap-weighted index. The 10 largest companies make up roughly 35% of its value. If Apple, Microsoft, and Nvidia are up big, the index looks fine — even if 300 other stocks are quietly sliding.

This is called a narrow rally. It looks strong on the surface but has no foundation underneath. Breadth indicators expose it immediately.

📈 Healthy breadth

Index +1.2%. 420 of 500 stocks advancing. New highs outnumber new lows 8:1. Advance/Decline line at a 52-week high. The rally is real.

⚠ Narrow breadth

Index +0.8%. Only 180 of 500 stocks advancing. 5 mega-caps responsible for all the gain. New lows starting to outnumber new highs. Warning sign.

The breadth indicators that actually matter

There are dozens of breadth metrics. These are the three MadStocks focuses on:

1. % of stocks above their 200-day moving average

This is the single most useful breadth number. If 65% of S&P 500 stocks are above their 200-day MA, the long-term trend is healthy. If that number falls below 40%, a growing portion of the market is in a downtrend — regardless of what the index headline says.

% Above 200-day	What it means
Above 60%	Broad uptrend. Favorable conditions for breakout trades.
40% – 60%	Mixed. Be selective. Many stocks are in no-man's land.
Below 40%	Broad downtrend. Most breakouts will fail. Reduce exposure.

2. Advance / Decline (A/D) ratio

On any given day, count how many stocks went up and how many went down. The A/D ratio is simply advancers divided by decliners.

More importantly, the cumulative A/D line — a running total over time — is one of the best leading indicators of market health. When the index makes a new high but the A/D line does not confirm it, that divergence is a warning that the rally is thinning out.

3. New 52-week highs vs new 52-week lows

In a genuine bull market, you expect to see many more stocks hitting new highs than new lows. When new lows start to outnumber new highs — even while the index holds up — it is an early sign that underneath the surface, stocks are quietly breaking down.

On MadStocks, the dashboard shows all three of these metrics updated daily alongside the current market regime classification. Open it every morning as your first check.

What does a "breadth divergence" look like?

A divergence is when breadth and the index tell different stories at the same time. The most dangerous pattern for traders:

Index makes a new all-time high
But the % of stocks above the 200-day is declining
And the cumulative A/D line is flat or falling

This setup preceded every major market top in the last 30 years — 2000, 2007, 2021. It does not mean "sell everything today," but it does mean "tighten stops and do not add new positions aggressively."

Three rules for using breadth before you trade

#	Rule
1	Never add a new position when breadth is deteriorating. Even if your individual stock setup looks perfect, if the broad market is quietly breaking down, the odds are against you.
2	Look for sector breadth, not just market breadth. Even in a weak overall market, individual sectors can have strong internal breadth. If Technology breadth is healthy, tech setups are safer than energy setups.
3	Watch the direction of change, not just the level. Breadth at 55% and falling is more dangerous than breadth at 45% and rising. The trend in breadth matters as much as the absolute number.