Photo credit: www.investopedia.com

Market Signal Indicates Potential Gains Ahead

Key Takeaways

On Thursday, a noteworthy signal known as the Zweig Breadth Thrust (ZBT) was triggered in the stock market, suggesting a significant shift in market momentum typically favorable for future stock performance. Historical data shows that post-ZBT signals, the S&P 500 has enjoyed solid gains, with average returns of 14.8% over six months and 23.4% over a year.

The recent uptick in the stock market follows a rebound from what some are terming a “Liberation Day” decline, fueled in part by a prevailing sense of optimism regarding the Trump administration’s intent to mitigate rising tensions with China.

Understanding the ZBT Signal

The ZBT is identified when the percentage of advancing stocks on the New York Stock Exchange (NYSE) surges from a moving average of below 40% to above 61.5% within a 10-day span. This pattern, observed only 19 times in the last eight decades, is regarded as a strong bullish indicator and reflects enhanced overall market activity.

Ryan Detrick, chief market strategist at Carson Group, has noted the historical success of this signal post-World War II. “This signal has been 100% effective, with the S&P 500 registering gains six and twelve months following each instance,” he stated. Indeed, the data surrounding the last 19 ZBT occurrences supports these optimistic outlooks, revealing consistent upward trends in the S&P 500.

The recent stock market rally is attributed to a renewed investor optimism, particularly due to suggestions that the White House might be looking to lessen tariffs—currently at 145%—imposed on China. This sentiment has seen the S&P 500 gain momentum, following a streak of gains exceeding 1.5% over three consecutive sessions.

Skepticism Surrounding ZBT’s Predictive Capability

Despite the apparent enthusiasm surrounding the ZBT signal, some analysts express caution regarding its predictive accuracy over the long term. Notably, technical analyst Tom McClellan conducted a study on Breadth Thrusts during the 1929-1934 period and found that these signals did not consistently translate into reliable bullish trends.

McClellan’s findings indicate that while an initial ZBT signal in November 1930 led to a brief rally, the bullish sentiment quickly waned, giving way to a continued bear market. Subsequent attempts through additional Breadth Thrusts during this tumultuous period failed to maintain upward momentum.

In reflections made during 2015, as another ZBT signal emerged rapidly following market peaks, McClellan voiced concerns regarding its effectiveness, especially considering it aligned with what appeared to be the onset of a new downtrend. Although stocks indeed advanced after that particular signal, the gains were modest, marking it as one of the less impactful ZBT rallies in history.

As the market currently navigates this newly identified signal, its future implications remain to be seen, and analysts will be closely watching for any signals that suggest a sustained upward trajectory or a possible retreat.

Source
www.investopedia.com