V. 19:13 (46-52): Market Breadth or Beta by Dennis D. Peterson

V. 19:13 (46-52): Market Breadth or Beta by Dennis D. Peterson
Item# \V19\C13\158BETA.pdf
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Market Breadth Or Beta?

Breadth and beta both start with b, but what else do they have in common? Maybe a way to help make trading decisions.

by Dennis D. Peterson

Market breadth is a measure of market momentum. When momentum is positive and increasing, the market is bullish, and when momentum is negative and decreasing, the market is bearish. Some stocks are highly correlated with market momentum; that is, when the market is bullish, the stocks are rising, and when it is bearish, the stocks are declining. The correlation that a stock has with a market is known as its beta value. Thus, knowing how to measure market momentum is helpful in confirming the direction some stocks will take.

USING BETA

A beta of 1.0 means the stock and the market have highly correlated trends. A stock with a beta greater than 1.0 means the stock will increase (or decrease) faster than the market. For example, Microsoft (MSFT) has a current beta of 1.0 compared to the Nasdaq composite. But beta can change; in early 1997, MSFT was going up while the Nasdaq was going down, which drove down the beta to less than 1.0. When MSFT went up faster than the Nasdaq in the middle of 1997, its beta rose to greater than 2 (see Figure 1).




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