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.
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).