Constructing industry-group breadth and rotation measures

Rebuild the group as a miniature market

An industry group index is a composite of many related stocks. Once that composite is in place, advances, declines, and new highs and lows can be measured at the group level instead of only for the broad market or a single name.

Stocks in the same industry tend to move together, so a group can remain in its own advance while the overall market is declining. That shared motion is the construction reason for analyzing rotation at the industry-index level.

The group advance-decline line

The group advance-decline line is a cumulative total of the daily or weekly percent of advancing issues minus the percent of declining issues, then overlaid on the industry index.

When a weighted industry index makes new highs while the advance-decline line is already falling, the divergence is read as a top warning. Those comparisons are judged inside a one-year window because the line has a long-term downward bias independent of short-term index weakness.

The high-low index

The high-low index is the net count of 52-week highs and lows over five days for studies of one year or less, or over five weeks for longer studies, expressed as a percent of issues in the group so membership changes do not distort the series.

A new high or low in the group index that is not matched by the high-low index is treated as a late-stage move that may be near a reversal, because fewer members are still making new extremes.

Overbought and oversold position lines

The overbought-oversold construction is an advance-to-decline ratio plotted against fixed position lines. Readings above the upper line are labeled overbought. Readings below the lower line are labeled oversold.

Diffusion and absolute breadth

The diffusion index averages the percentage of advancing stocks over the prior 10 days or 10 weeks. A downturn from a high reading while the group index is still rising is treated as a negative participation reading, and the reverse reading is used at bottoms.

Absolute breadth is the absolute difference between advancing and declining counts, then smoothed with a 10-day moving average for studies of one year or less or a 10-week average for longer studies. High readings are treated as constructive. Very low readings are treated as weakening.

The same constructions on composites and unweighted paths

The same five breadth constructions can be applied to major exchange composites and to equal-weighted group indices that add the average percent change of every member. Each stock then has equal influence, and the unweighted path can turn before a capitalization-weighted index.