Referenced SymbolsSPX+0.74%DJIA+0.05%COMP+1.26%U.S. stocks closed out a strong week on a positive note Friday — but it’s the triggering of a rare, bullish technical indicator in the previous session that has investors excited.Stocks went on a tear after President Donald Trump earlier this week said tariffs on China imports would soon fall from their present level at 145%, and after he said he wasn’t considering an attempt to fire Federal Reserve Chair Jerome Powell.What stock-market bulls particularly liked about the rally is that it was broad. A vast majority of stocks participated — enough that Thursday’s session triggered what’s known as the Zweig Breadth Thrust Indicator, which was popularized around four decades ago by the late Martin Zweig, a legendary investor and market timer.
Here’s a description of it from Dean Christians, senior research analyst at SentimenTrader:
The indicator measures NYSE advancing issues as a percentage of advancing and declining issues, smoothed by a 10-day exponential moving average. An alert is triggered when the indicator cycles from below 40% to above 61.5% in 10 trading sessions or fewer.
As Christians explained in a Friday note, the emergence of thrust signals during a market downtrend often indicates the broader trend is starting to reverse. That doesn’t guarantee a smooth transition, but history suggests stocks tend to be higher six to 12 months later, he said, while noting that short-term volatility is likely to persist, especially given continued uncertainty around tariffs.
Mark Newton, head of technical strategy at Fundstrat, noted the median return for the S&P 500
SPX+0.74% after a Zweig thrust “tends to be quite positive following a period of abnormally high market breadth happening from extremely low levels.” (See table below).
The record is impressive, particularly when looking at 12-month forward gains, which saw the S&P 500 rise in all 10 instances following a Zweig breadth thrust going back to 1982.But technical analysts are quick to caution there is more to consider and that investors may be in for a bumpy ride, at least in the short term.“While I suspect this helps to confirm that our April lows are in place, it’s right to reiterate that weekly momentum remains negative. Furthermore, a lot of work is required to help with weekly momentum and the technical structure’s improvement,” Newton wrote. “At present, I view this as an intermediate-term bullish signal for U.S. stocks.”And Christians at SentimenTrader cautioned that not all Zweig signals are without risk. In particular, he highlighted the 2015-16 stock-market correction caused by a growth scare, an episode that could arguably serve as an analog to the current market setup.
A rally on par with 2015’s 4.8% maximum gain following a Zweig signal would take the S&P 500 to its 200-day moving average around 5,747, he noted. The S&P 500 subsequently fell back, posting a maximum pullback of more than 9% (see chart below).What might trigger a retest scenario similar to the one in 2015? “One likely cause would be the failure to secure trade agreements, or a material deterioration in hard economic data stemming from the initial tariff shock, prompting consumers and businesses to delay spending and investment decisions,” Christians wrote.The S&P 500, Dow Jones Industrial Average DJIA+0.05% and Nasdaq Composite COMP+1.26% stretched their winning streaks to four sessions on Friday, with all three posting solid weekly gains.Technical analyst Tom McClellan, editor of the McClellan Market Report, said in a Friday update that he doubts Thursday’s Zweig thrust will prove to be a “stellar example of this signal.”He believes the market strength that triggered the indicator is a “typical bear-market countertrend rally,” which could fizzle fast. McClellan has been neutral for short- and intermediate-term trading cycles the past two days, after being bearish for the previous seven sessions.
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