The powerful action in the stock market last week has gained further bullish confirmation as a Zweig Breath Thrust (ZBT) buy signal was generated on November 3rd. This indicator was developed by Martin Zweig and is based on a 10-day EMA of the NYSE Advances / (Advances+ Declines). A signal is generated when the ZBT drops below 0.40 and then rises to above 0.615 in ten days or less.
According to the Carson Group and Ned Davis, past signals have averaged a solid twelve-month gain of 23.3% in 100% of the instances since 1945. The March 31st signal came at a time when many were not convinced that the rally from the start of the year was not just a bear market rally.
Ironically, the March 31st signal ironically received little attention in the financial media. A majority of strategists and analysts were focused on the inverted yield curve and were betting on a recession.
As I commented in March “It may take a strong move above 4200 or even 4250 in the S&P 500 to convince more of the stock market bears to change their outlook.” This turned out to be the case.
This year was the first time since 1962 that there have been two ZBT buy signals in a single year. Stocks peaked on December 12, 1961, and began a 153-day decline of over 27% that was later referred to as the “Flash Crash of 1962”.
The ZBT signal came three weeks after the low as the Dow Jones Industrial Average rose for six more weeks before another eight-week decline. The 2nd ZBT buy on 11/5/62, with the Dow at 645, began a rally that lasted until May 1965. The Dow eventually moved above 940. This signal came just one week after President Kennedy’s TV address on the Cuban missile crisis.
The March 31, 2023 ZBT buy signal came as the Dow closed at 33,274 and it eventually rose to a high of 35,679 at the end of July. This was a gain of 7.2% from the March 31st close. Last week’s new ZBT buy signal was generated as the Dow closed at 34,061. At the prior week’s low of 33,327, the Dow was down 3% from the March 31st close.
As someone who consistently writes and teaches about my methods of advance/decline analysis the ZBT signals have been often supported my conclusions from the A/D lines like in January 2019.
For Zweig, the sudden change in the A/D numbers from poor to strong reflected a significant change in the flow of money to the investment markets increasing liquidity. From Investopedia “ Zweig furthermore highlights the fact that the majority of bull markets begin with a Breadth Thrust.”
All year I have been chronicling the choppy action of the advance/decline analysis and in last week’s “Should You Follow The Bulls Or Bears?” I discussed the week’s very strong market internals. The new ZBT buy signal should make the decision easier but still pay attention to the risk and don’t chase prices.
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