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The stock market is doing even better than you think, and this chart shows why

  • One gauge of market health is its breadth, which measures the number of stocks advancing relative to the number of stocks declining.
  • Jonathan Krinsky of MKM Partners notes the Russell 3000's breadth is quite strong at current levels.
  • This may suggest the rally is technically sound, but from a valuation perspective stocks may appear elevated at current levels.

One technical measure of market strength shows that the rally is on firm footing, according to one technical analyst.

Market breadth — the number of stocks advancing relative to the number of stocks falling — is now quite strong, observes Jonathan Krinsky, chief market technician at MKM Partners.

Specifically, Krinsky is referring to market breadth within the Russell 3000, an index that tracks nearly all U.S. equities. With roughly 73 percent of all stocks in the Russell 3000 above their 200-day moving averages, "it's tough to make the case that breadth is weak," as Krinsky wrote in a recent note.

"We use the 60 percent threshold as the bull-bear level. If you go back to the last time we had a significant breadth divergence that did lead to a market correction, that was back in the summer of 2015. And we held under that 60 percent threshold for almost two months before the market finally rolled over," he said.

Though some market watchers have made the argument that a mere handful of high-performing stocks are driving the broader market rally (notably Apple, Facebook and Amazon), that doesn't mean other stocks aren't participating in the rally, Krinsky noted.

A small number of stocks contributing the most gains would be troubling if the remainder of equities were not participating and moving lower, "and that's really not the case," he said in an interview Monday on CNBC's "Trading Nation."

While this measurement indicates strength in Krinsky's eyes, investors ought to keep an eye on that percentage of Russell 3000 components above their 200-day moving average. If that number were to roll beneath 60 percent as it did two years ago, "that's really where we would get worried."

Though breadth is indeed strong, stocks' valuations appear a bit elevated at current levels, said Chad Morganlander, portfolio manager at Washington Crossing Advisors. He remains cautious on equities at current levels.

The market's breadth has "broadened" because of a perception that there is going to be synchronized global growth and that a fiscal stimulus package will come out of Washington, he said on "Trading Nation."

In other words, the fact that many stocks have moved higher recently doesn't necessarily mean that the rally will continue.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

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Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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