An obscure measure of stock market momentum recently sent a signal that the six-month rally in U.S. equities has more room to run.
- A market "thrust" indicator recently signaled that the U.S. stock market rally since mid-October will persist.
- Its historical reliability depends on the time frame assessed.
- Thrust could face resistance from high interest rates and slowing economy.
Known as the Zweig Breadth Thrust Indicator, named for American stock investor and financial analyst Martin Zweig, the calculation measures how quickly sentiment in the market shifts.
It does so by dividing the 10-day moving average of the number of advancing stocks by the total number of stocks. When it "thrusts" from a level below 40% to more than 60% in a 10-day period, it triggers a signal.
That signal, many market observers claim, is a bullish one. If they're right, it would bode well for stock investors who've already enjoyed an 18% gain in the S&P 500 Index since mid-October.
Signaling a Forecast?
"The extremely rare Zweig Breadth Thrust just triggered," Ryan Detrick, chief market strategist of investment advisor Carson Group LLC, stated in a tweet Sunday. "It has only happened 14 times since 1950 and the S&P 500 (Index) was higher a year later. every. single. time. Up more than 23% on average a year later as well."
The last time the signal was "triggered," Jan. 7, 2019, the Index surged 27% in the next 12 months.
But not everyone trusts its reliability. Tom McClellan, a technical market analyst and editor of The McClellan Market Report, expressed less optimism in a separate tweet last week.
"We did get a Zweig Breadth Thrust Signal last week, and yes, it came on day 10," McClellan's tweet stated. "Historically, the record is mixed, though. Some great signals, some meh, some horrible."
It's Accurate, Except When it's Not
In 2015, McClellan studied the signal going back to 1928. What he found were inconsistent results that "were not as good as one might hope."
Twelve times, the signal flashed "falsely," meaning stocks did not rally. Eleven of those times occurred prior to 1950, a period when Mark Ungewitter, a portfolio manager with Charter Trust Company, said in a tweet that "many technical models in popular use today had major failures."
Meanwhile, McClellan noted that the indicator did not flash a bullish signal at any time from 1984 through 2004—a period in which the S&P 500 posted calendar-year gains all but four times. Nine times in that period, the index's annual gain exceeded 20%.
Nonetheless, he didn't question the premise behind the signal.
"I am one of the biggest believers in the world about the idea of stock market breadth being one of the best tools we have to indicate financial market liquidity," McClellan wrote. "The idea is that when there is such a signal it is a sign that a rapid surge of money is trying to push its way through the door to get into the market, and that is a sign of continuing liquidity to fuel an uptrend."
Of course, no time frame sets up exactly like the last. Market conditions have varied one way or another each time the indicator has flashed a bullish signal.
This time, it happens amid the Federal Reserve's most aggressive interest rate increases in almost 20 years.
That period, based on indications from the Fed and investors' expectations, may end soon. If so, it offers its own history lesson.
Since 1970, the S&P 500 Index has increased in eight of the 11 one-year periods after the Fed ended a rate-hike campaign, with an average gain of almost 15%.