Measuring Global Stock Market Breadth

This past weekend, we wrote updates for our U.S. and India subscribers, discussing stock market breadth around the globe. When I do these types of updates, we often get asked why we look at international markets both in their local currency terms AND in terms of U.S.-listed exchange-traded funds (ETFs). Why not one or the other? In this quick post, we'll walk through our thought process behind it.

First, let's start with the question of why we want to measure global breadth in the first place. To gauge risk appetite for equities as an asset class, we need to understand whether there are more uptrends or downtrends out there. Going through each chart across multiple timeframes is a quick and simple way to determine whether we're in an environment where we want to be buying dips, selling rips or doing nothing in equities.

So what's the difference? Why repeat the same exact analysis of both the ETFs and these markets' indexes themselves?

For us, it's pretty simple. ETFs have U.S. dollar exposure, so if you're trading international markets using these vehicles, you need to take into account the currency effects. There's nothing worse than being right on a market directionally but potentially losing money because of the country's currency depreciation versus the dollar. If you're trading these vehicles, you cannot ignore this factor because sometimes it makes a big difference.

[For more tips on analyzing stock markets both at home and abroad, check out my Technical Analysis course on the Investopedia Academy.]

It's also important to note that, when you're investing in these country-specific ETFs, you're usually not getting exposure to that country's entire stock market. What tends to be included in these vehicles is a custom basket of the largest and most liquid stocks in their market. So while it's generally a very good proxy, it's not perfect nor exact.

The second aspect of this conversation is why we care about international markets in their local currency terms if we're not in those countries trading them. As tempting as it is to believe the world revolves around the U.S., it's important to remember that money is flowing into these markets from all over the world. Regardless of the vehicle the trade is being made through, the assets ultimately need to be purchased in their local currency to provide the buyer and seller with their desired exposure. As a result, looking at the index itself gives us perspective on the supply/demand impact of all the bets being made on this market around the globe.

Neither method is inherently better – it all depends on the purpose of your analysis. The point of this post is just to outline a few points to be aware of when reading or performing your own research using these vehicles.

Thanks for reading, and let us know your thoughts.

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