A Rare "Zweig" Buy Signal

03/10/2014 9:00 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

A very rare indicator has spoken; this is a "breadth thrust" indicator, attributed to the late Marty Zweig, explains Mike Cintolo, editor of Cabot Market Letter.

In brief, the indicator is based on the 10-day ratio of the NYSE advance/decline line, which bottomed out at 41% and then very quickly reversed course to climb above 65%.

This “breadth thrust” indicator has only spoken five times since 1940 (July 1962, November 1962, December 1971, August 1982, and March 2009), and every time, it preceded a very profitable run for the market over the ensuing six and 12-month periods.

According to Sundial Capital, the average gain over six months was 20.0% and the average gain over 12 months was 30.2%. Considering this indicator a little deeper, we have a few thoughts.

First, five signals is a small sample, and thus not something you can hang your hat on. Furthermore, those five signals—unlike the recent one—occurred after major bear markets, so this one may not be as reliable.

However, the composition and character of the NYSE has changed over the decades and today the Nasdaq is home to most leading stocks.

There's not as much historical data on Nasdaq breadth-thrust signals (the exchange debuted in 1971), but it's encouraging to note that the current signal was even more extreme on the Nasdaq—the 10-day advance/decline line bottomed at 37% and quickly reversed to above 60%, which has never happened before over a two-week period.

But can the market keep climbing for another year after we've already had a great 15-month bull market? Absolutely! There's no credible alternative to stocks today if you want your money to grow, so we could easily see a continued flow of assets out of “safer” investments and into stocks.

Looking out, our indicators, our long-term Cabot Trend Lines remain bullish, as they have been since January 2013. It's been a great bull market. The trend is your friend.

Second, our intermediate-term Cabot Tides remain bullish, though they were bearish for a 12-day spell in the depths of the late-January correction.

Third, our Two-Second Indicator is bullish, as the number of stocks hitting new lows on a daily basis remains well below 40; in fact, it's been generally below 20! This tells us market breadth is extremely good, which tells us this bull market is not in its final stages.

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