Market Breadth, Sector Rotation & the VIX
The market's internals: how many soldiers follow the generals, where money is rotating, and what fear costs.
Cycles & MacroAdvanced 7 min read· Lesson 3 of 3 in Market Analysis
Breadth
Indexes are cap-weighted — a handful of giants can mask decay beneath. Breadth asks how many stocks actually participate: advance/decline lines, % of stocks above their 200MA, new highs vs new lows. Rallies where breadth diverges (index up, fewer stocks above their 200MA) age poorly; a mechanical proxy here: Factor-Rank a whole stock list by MOM_3M and watch how many names actually score positive.
Sector rotation as signal
WHERE money rotates is a message: into staples/utilities = defense (late cycle fear); into small-caps/discretionary/financials = risk appetite (early cycle). Relative-strength ranking of sector lists reads the message without forecasting — the Market-Analysis application of the momentum tool.
The VIX
The VIX distills S&P option prices into 30-day expected volatility — the price of insurance. Sub-15: calm (complacency at extremes); 20s: worry; 35+: panic historically clustered near tradable lows (max fear ≈ max opportunity, eventually). It's a contrarian gauge at EXTREMES and noise in the middle; VIX spikes mean-revert, which is also why 'buying VIX' as a holding decays.
Synthesis
Healthy market: index up + broad participation + risk-on rotation + calm-but-not-comatose VIX. When those disagree, the disagreement is the analysis — trim risk when the soldiers stop following the generals.