In late 2023, the famous Breadth Thrust indicator flashed a bullish signal for the stock market. Since the Second World War, it has only happened a few times. But why is this important?

-What is the Breadth Thrust Indicator?

Developed by Marty Zweig, the Breadth Thrust is an indicator that analyzes the general momentum of the stock market to reveal the times when buyers begin to dominate the market. The indicator calculates the proportion of advancing/declining stocks and is widely known for its signal at the beginning of a new bull market.

 

Calculating the Zweig Breadth Thrust

Mr. Zweig created the indicator by tracking the proportion of Advancing/Declining stocks (AID ratio) over ten days. The indicator is based on the NYSE and focuses on instances when oversold market conditions are moving to extremely overbought in a short period.

The signal for the new bull market

When the Breadth Thrust indicator moves from below 40% to above 61.5% within 10 days, it indicates the beginning of a potential new bull market.

■ From below 40% to above 61.5% (within 10 days)

Formula

The Breadth Thrust is simply the 10-day moving average of the following formula:

■ (Advancing Stocks) / (Advancing + Declining stocks)

Advancing/Declining stocks

As Mr. Zweig mentioned in his book “Winning on Wall Street”: “It's very rare for advances to lead declines by a ratio of 2-to-1 over such a span. When that happens, one could rightly say the market's momentum is strong. The test then would be the market's performance after such relatively rare events.”

Also, he said: “The Advance/Decline Indicator has had an outstanding record in calling the bull market advances. The existence of a 2-to-l advance/decline figure (for ten days) is the first condition necessary to herald a major bull advance. Just three months after such instances in the past, the stock market rose an additional 12.3%.”

 

Examining the Signal on S&P500

Historically, and according to the CarsonGroup, there were only 14 ZBT signals. The following table includes all these signals and examines what happened next to the stock market (S&P500).

Table: Historical ZBT signals (NYSE)

Observations

Every time a ZBT signal flashed, the S&P 500 moved considerably higher a year later. Overall, these are some key observations after examining the table:

■ Only 14 Breadth Thrusts signals have flashed since 1945 while no signals have flashed during the period 1984 to 2009

■ The ZBT signals had shown a 100% success rate after 6 and 12 months:

-The S&P went higher by 5.4% after 1 month (on average)

-The S&P went higher by 8.3% after 3 months (on average)

-The S&P went higher by 17.2% after 6 months (on average)

-The S&P went higher by 23.3% after 1 year (on average)

 

 

 

Who was Marty Zweig?

Martin Zweig was a famous American investor who had predicted the 1987 stock market crash. Apart from his popular newsletter (The Zweig Forecast), he has published two books.

■ “Winning on Wall Street” in 1986

■ “Winning With New IRAs” in 1987

Advice from Mr. Zweig

This is some key advice from Mr. Zweig, after reading his book “Winning on Wall Street.”

• Strength does indeed tend to lead to greater strength. Every bull market I've seen has started with a tremendous rally.
• For a raging bull market, you need falling interest rates, probably an economic recession (that helps the Fed to loosen up and rates to fall), lots of cash on the sidelines, good values in the market, low price/earnings ratios-and a great deal of pessimism.
• The major direction of the market is dominated by monetary considerations, primarily FED policy, and the movement of interest rates.
• Combining to produce a monetary "climate" are loan demand in the economy, liquidity in the banking system, inflation or deflation, and, of course, policy decisions by the Federal Reserve.
• Beware of the crowd when the crowd is too one-sided.
• The optimism or pessimism among mutual funds can be measured by constructing a simple ratio of cash divided by assets {Mutual Funds Ratio = Their Cash / Their Assets}.
• Remember you must deal with probabilities, employ sensible strategies to limit risk, and get aggressive only when conditions warrant.
• In the long run, a 60 percent success rate translates into huge gains, a 50 percent rate into solid gains, and even a 40 percent rate can beat the market.
• I would estimate that stocks spend only about 20% of the time in the most active phases of the bull trend and only about 10% in the severe downward periods of major bear markets. Roughly 70% of the time stocks either meander in a neutral trading range or undergo minor rallies or declines.

Also, according to Martin Zweig, December is the best month for the stock market, while September, June, and February are the worst months.

 

Final Thoughts

Mr. Zweig was an exceptional stock market analyst. I had a lot of fun reading his book and writing this article. There is so much to learn from him.

The Breadth Thrust is based on the simple idea that an aggressive change of advancing/declining stocks reveals the change of the general market momentum. This change in market momentum is considered essential for the end of a bear market and the beginning of a new bullish trend. As Mr. Zweig said, strength tends to lead to greater strength.

Interestingly, all past 14 Breadth Thrust signals on the S&P500 were successful after 6 and 12 months.

 

Sources:

□ Book: “Winning on Wall Street”:1986

□ CarsonGroup.com

 

■ Marty Zweig and the Zweig Breadth Thrust (ZBT) Signal

2nd of January, 2024

G.P. for TradingCenter.org (c)