- Dave Moenning
- 28 Nov 17
I have likely mentioned a time or two that I believe I have earned, at the very least, an honorary degree from Wall Street’s school of hard knocks over the last 30 years. You see, I didn’t have a mentor to teach me the stock market game. No, I simply tried to learn as much as I could, as fast as I could, and attempted to stay on Ms. Market’s good side as often as possible along the way. To be sure, it’s been an exciting and, for the most part, enjoyable ride.
It is for this reason that I derive a fair amount of pleasure from writing about some of the lessons I’ve learned. It is my sincere hope that I can pass along a nugget of wisdom every now and again about how the game is played. And I especially enjoy pointing out investing strategies/concepts that seem to work over long periods of time. Or on the other side of the coin, stuff that simply doesn’t work at all anymore.
On the subject of the former is something called a “breadth thrust.” I’m not sure who actually invented the concept, but I learned about it from Ned Davis and the late Marty Zweig. According to Mr. Davis, who possesses an enviable long-term record as a risk manager, “When truly long-lasting advances get started, they usually do so with a burst of strength much like a space rocket does when it leaves the launching pad.” Hence the use of the term “thrust” in the name of the indicator.
There are many variations of these “breadth thrust” indicators including price, volume, and advances vs. declines. The idea is simple. When stocks run higher in a meaningful fashion, the move tends to be accompanied by a thrust in market breadth. And history shows that such “breadth thrusts” have been wonderful predictors of above average returns over the ensuing week, month, quarter, and year.
The 10-Day A/D Thrust Indicator
As I mentioned, I follow several such “thrust” indicators, but one of the best involves a surge in advancing versus declining issues. One such indicator involves the ratio of 10-day advances to 10-day declines. When this ratio exceeds 1.9 – indicating that advancing issues have swamped declining issues over a two-week period – a buy signal occurs.
According to Ned Davis Research, the mean returns for the S&P 500 after the hypothetical buy signals since 6/23/1947 (the date of the first signal from the data available) are impressive. For example, NDR reports that since 1947, the average return for the S&P 500 five days after a breadth thrust buy signal has been 0.82%. This is nearly 5 times higher than the average for all 5-day periods of 0.17% seen over the same time period. And the market was higher 67% of the time (32 out of 48) after the signal.
Two weeks after a breadth thrust buy, the S&P has been up 1.57% on average, which is 4.75 times higher than the mean of 0.33% for all 10-day periods. And the batting average for a “successful” signal again stands at 67%.
One month after the signal, the S&P 500 has been up an average of 3.05%, which is 4.12 times the mean for all 22-day periods. And stocks have been higher after 83% of the signals.
Three months later, the S&P’s average gain is 4.63% vs. 2.09% and stocks were higher 37 out of 48 times.
Six months after a breadth thrust buy, the S&P advanced 10.53% on average, which is more than double the 4.25% average gain for all six-month periods – with stocks advancing 87.5% of the time.
One year later, the S&P sports a mean return of 16.54% versus 8.73% for all 252-day periods – and stocks were higher 47 out of 48 times. I.E. Stocks were higher one year after the “breadth thrust” signal 98% of the time. Pretty good signal, eh?
Yes, it is definitely true that “thrust” signals have become more frequent since the Great Recession. Since 2008, there have been 20 breadth thrust buy signals. And it is indeed worth noting that there were only 28 such signals from 1947 through 2007. The increased frequency of breadth thrust buy signals can be blamed on high-frequency trading, the advent of ETFs, etc.
However, the good news is the effectiveness of the breadth thrust signal appears to remain solid. For example, one month after the signal, the S&P was higher 2.58% on average versus 0.74% for all 22-day periods. And stocks were higher 85% of the time.
One year after the signals that occurred since 2008, the S&P has been higher 100% of the time, sporting an average gain of 15.6% (versus 8.7% for all 252-day periods). Not bad, not bad at all.
So, from my seat, it is fairly safe to say that the odds would seem to favor the bulls when a rally in stocks is accompanied by a “breadth thrust.”
The Problem Is…
Now for the bad news. According to NDR’s computers, the last breadth thrust buy signal occurred on 11/17/2016. And while the signal produced returns that were largely better than average – and positive across all time-frames measured – the signal has now expired.
As such, one can argue that the market’s momentum has waned and that after a long run higher, it could be time for the bulls to take a break. In fact, the last two times there was a “break” in the string of breadth thrust buy signals – 2010 and 2015 – the “mini bears” of 2011 and 2015/16 ensued.
So… If you find yourself firmly in the bull camp these days, you should probably be rooting for the bulls to find a way to get some “oomph” behind an advance – and soon. If not, it might soon be time for a break in the action and for some of that long-lost volatility to return.
Thought For The Day:
You don’t control your fate, but you do control the formation of your character. -Rod Dreher
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Tax Reform
2. The State of the Economy
3. The State of the Earnings Season
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.
The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.
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