In a recent article, I made the case for looking at the market's big picture. That means going beneath the surface of movement in the major averages to detect underlying strength and weakness among sectors and stocks. Thursday's market decline gave us an excellent example of why such analyses are important.

Let's take a look at the market action leading up to Thursday's drop:

The Dow (DIA | Quote | Chart | News | PowerRating) had made recent bull market highs and was up six days in a row. That was enough to make the news in the popular media.

Still, there were problems beneath the surface. The Dow had been up for five weeks in a row, which -- as a different article showed -- was not associated with favorable returns going forward. Even more troubling was the fact that, as the Dow rose, a decreasing number of stocks made new highs and an increasing number made new lows.

Here is the table from my personal site, where I track new highs and lows:

What we can see is two things:

* Although the Dow was making multiyear highs, the number of stocks making new highs in the S&P 500 large caps, the S&P 600 small caps, and the S&P 400 mid caps was relatively small. At its peak, only 200 of the 1500 issues were making new highs.

* From May 5th through the 10th, that modest number of new highs dwindled further. By May 10th, only half as many stocks were making new highs as on May 5th, although the Dow had closed higher.

Now let's take a look at the number of stocks across all exchanges that made new 20 day highs and new 20 day lows:

This was quite a surprise: By the 10th, the Dow was at new highs, but the ratio of stocks making new highs to new lows was only about 3:2. Clearly weakness had set into segments of the market even before the market drop on the 11th.

The moral of the story is that most of the popular market indices are capitalization-weighted. Large moves in a handful of highly weighted issues can make the entire market look strong or weak. It's a stock market, but also a market of stocks. If rising tides aren't lifting all boats, we're much more likely to be grounded when the tide comes in.

Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com and a blog of market analytics at www.traderfeed.blogspot.com. His book, Enhancing Trader Development, is due for publication this fall (Wiley).