Ask Colin

I note that Elder says NH-NL doesn't work in markets dominated by a few stocks - would this apply to our market?

I believe that Dr Elder is correct. His point would also be true for any other breadth indicator such as the Advance Decline line. The whole idea is that stock market indexes measure what the large stocks are doing. The breadth indicators measure what the plurality of stocks - the broad market - is doing. It is therefore true that where a market only had a relatively small number of stocks listed, this kind of indicator may well be deficient because the basic assumption on which it stands has been negated.

The Australian market, though, has over 1500 stocks and my work on it seems to indicate that there are enough stocks to get good readings from these breadth indicators. The one area where I have serious reservations, though, is to take breadth indicators down to industry sector levels. Just as sector indexes tend to be dominated by one or a few stocks, so there are often not enough stocks for breath indicators to give good signals.

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