Module 7 · Lesson 7 of 7 · Stocks and ETFs · About 5 minutes
Sectors, Indexes and Market Breadth: Reading the Whole Market
On this page
Before you read: Leveraged and Inverse ETFs: Daily Reset and Volatility Decay
What you will learn
- How stock indexes are weighted: by market value, by price or equally.
- What sectors are and how sector ETFs are used to compare parts of the market.
- What market breadth measures, such as the advance-decline line.
How are indexes weighted?
If an index rises 1%, did most of its stocks rise?
An index tracks a group of stocks with a formula. The formula decides how much each stock counts:
- Market-value (capitalization) weighting. Each stock counts in proportion to its market value, usually adjusted for the shares available to trade. The S&P 500 works this way. The Nasdaq-100 uses a modified version, with caps that limit how much the largest companies can weigh. The largest companies have the most influence.
- Price weighting. Each stock counts in proportion to its share price. The Dow Jones Industrial Average works this way, so a 1% move in a $400 stock moves it ten times as much as a 1% move in a $40 stock, whatever the companies’ sizes. A $1 move in either stock has the same effect.
- Equal weighting. Each stock counts the same, rebalanced on a schedule.
Example. A fictional two-stock market-value index holds Company A worth $900 billion and Company B worth $100 billion. If A rises 2% and B falls 5%, the index moves 0.9 × 2% + 0.1 × (−5%) = +1.3%. The index rose even though one of its two stocks fell more than twice as far.
Index weighting diagram
Illustrative diagram constructed for teaching. Not real market data.
The diagram shows a fictional five-stock market-value index. One large stock rises while four smaller ones fall, and the index still rises. A small advance-decline line beside it falls on the same day. It is constructed for teaching and is not real market data.
What are sectors?
How would you group thousands of companies so you could compare them?
Sectors group companies by business. A widely used classification, the Global Industry Classification Standard (GICS), has 11 sectors, such as information technology, health care, financials, energy and utilities, divided into industry groups and industries. Sector ETFs and sector indexes let traders compare how different parts of the market have moved. Relative strength, in this sense, compares one sector’s or stock’s return with a benchmark’s return over the same period; it is a different idea from the RSI indicator.
Try it on a chart
- Find the sector groups. Each block is one company, sized by its market value.
- Find the largest company in the technology sector.
Charts and quotes are TradingView's data, not ours, and may be delayed.
What does breadth measure?
Is a market rise carried by many stocks or a few?
Breadth measures how widely a move is shared across the stocks in a market. Common measures include:
- Advances and declines. The number of stocks that rose and fell on the day. The advance-decline line adds up advances minus declines day by day.
- New highs and new lows. How many stocks reached a 52-week high or low.
- Percentage above an average. The share of stocks trading above, for example, their 50-day or 200-day moving average.
- Up and down volume. Volume in rising stocks compared with volume in falling ones.
When a market-value index rises while breadth weakens, the rise is being carried by fewer stocks, often the largest. That describes concentration. It does not tell you what the index will do next; narrow advances have continued for long periods.
What this does not tell you about indexes and breadth
- Index methods change, and each provider publishes its own rules. Those rules are the reference.
- Breadth measures depend on which stocks are counted and which exchange’s list is used.
- No breadth reading forecasts the market’s next move.
- Nothing here recommends any index fund, sector or stock.
Trademark note. S&P 500 and GICS are trademarks of S&P Dow Jones Indices LLC, MSCI Inc. or their affiliates, as applicable. Dow Jones Industrial Average is a trademark of Dow Jones Trademark Holdings LLC. Nasdaq-100 is a trademark of Nasdaq, Inc. All are used only for identification.
Method in Practice: breadth as context
Fictional example. John, Harbor Index futures, the prices, times, costs and results are all invented for teaching. This shows how a written plan can be built and tested. It is not a recommendation, and nothing here says how often this idea works.
Try it on a real chart. Look at the chart in this lesson, then test this idea yourself on past sessions with bar replay. Keep your own count, including the days with no trade.
The idea. Breadth counts how many stocks in an index are rising or falling. No reading forecasts the next move (this lesson). John uses it only to switch his long plan from Volume Profile Explained: POC, Value Area, HVN, LVN on or off: at 09:00, at least 60% of the index's stocks that moved must be rising (unchanged stocks are left out of the count).
John's plan
- Setup and entry
- The Volume Profile Explained: POC, Value Area, HVN, LVN lesson's plan, unchanged
- Context
- at 09:00, advancing ÷ (advancing + declining) for the index's stocks is at least 0.60. Otherwise the plan is off
- Risk
- $150 maximum, costs included
Three outcomes (the Volume Profile Explained: POC, Value Area, HVN, LVN lesson's replays)
-
Breadth 0.68, plan on: Replay A → +$75
-
Breadth 0.64, plan on: Replay B → −$104
-
Breadth 0.45, plan off: price crossed 101.20 twice, and John didn't act → $0
Show the full replays
Replays A and B are the Volume Profile Explained: POC, Value Area, HVN, LVN lesson's, unchanged. Replay C: breadth 0.45 at 09:00, so the plan is off. Two closes above 101.20: 101.30 at 10:00 and 101.40 at 10:30. No trade. Price then rotates between 100.90 and 101.60 until noon.
Test it yourself
- Write which list of stocks you count and from which data source.
- Replay the plan with and without the breadth filter, and count the days it removed.
- Try 0.55 and 0.65. If results swing, the threshold is doing the work.
Where it breaks
- Breadth depends on which stocks are counted.
- Good breadth doesn't stop a trade failing (Replay B).
- Index rules and members change.
Reflection question: Does a context filter in your plan have a number, and where does that number come from?
Check yourself
- In a price-weighted index, which counts more: a $300 stock or a $30 stock? Hint: the weight is the price.
- A market-value index holds A (80%) and B (20%). A rises 1% and B rises 6%. What is the index move? Hint: 0.8 × 1% + 0.2 × 6%.
- An index rises while the advance-decline line falls. What does that describe? Hint: how many stocks carried the move?
Reflect on your own process
- When you note an index move in your journal, do you also record a breadth reading, and which one?
- Which benchmark does your plan use for relative-strength comparisons, and why did you choose it?
- Where would you check an index's current methodology before relying on how it is weighted?
- Does a context filter in your plan have a number, and where does that number come from?