SentimenTrader ---- Two more indicators for the bullish side of the ledger

 

Two more indicators for the bullish side of the ledger

Key points

• Some indicator signals are best used not as a standalone trading system but as weight of the evidence
• Our Breath Thrust Indicator continues to signal ongoing strength
• The Short-Term Risk Levels indicator has reached an extreme level that has typically been followed by higher stock prices over the past 15 years

Breadth Thrust Indicator spikes - again

The NYSE Zweig(Breadth Thrust) indicator is a technical indicator used to identify market momentum. It is computed by calculating the number of advancing issues on an exchange, divided by the total number of issues (advancing + declining), and generating a 10-day exponential moving average of this percentage.

A true "Zweig Breadth Thrust" occurs when it moves from below 40% (indicating an oversold market) to above 61.5% (indicating an overbought market) within any 10-day period. However, the indicator provides valuable weight of the evidence even if we apply less stringent parameters.

The chart below displays every date the Breadth Thrust indicator crossed above 60%, including all overlapping signals. The most recent signal occurred on 2024-08-19.

The critical thing to note is that these signals tend to occur within the context of a rising market. Ideally, there is a signal early in a bull market, and regrettably, there are occasionally signals that occur late in a bull market. However, the point here is not that this signal will be used as a trading system but as a measure of the likelihood that a given market advance will continue.

The table below summarizes the S&P 500 performance following the signal dates highlighted in the table above.

The critical thing to note is the high (and above average) Win Rates and solid Median Returns across the board. These results

Short-Term Risk Levels reach (a counterintuitive) extreme

Here, we present something of an anomaly for investors to make of it what they will. As the name implies, our Short-Term Risk Levels indicator is intended to identify whether short-term risk in the stock market is high or low. However, things have worked in the opposite direction for the last 16 years. We cannot explain why; each investor can make of it as they please. Still, the numbers are what they are - and they are pretty compelling.

The chart below highlights all dates since 2004, when the Short-Term Risk Levels indicator was equal to 9. The most recent signal occurred on 2024-08-19.

A close look at the chart above reveals that the first two red dots were followed by the disastrous 2008-2009 market decline. However, since then, most signals have been followed by higher stock prices.

The table below summarizes the S&P 500's performance for all the dates highlighted in the chart above. The key points are the high and above-average Win Rates and Median Returns, especially six and twelve months later. 

The chart below displays only signal dates at least three months apart to eliminate overlapping signals.

The tables below display signal-by-signal performance and a summary of S&P 500 performance following all signals. Note the 90%+ Win Rates for two, six, and twelve months.

Let's add a moving average filter to refine things one more level. The chart below displays only those signal dates at least three months apart when the S&P 500 Index was above its 100-day moving average. In other words, we only want to consider a signal if the market is already objectively in an established uptrend.

One thing to note is the relatively small sample size. The August 19th signal is only the seventh signal in the last twenty years. Still, Win Rates for two months and out have been 100% to date. This does not guarantee that that will always be the case.

What the research tells us…

Neither indicator signal above guarantees that the stock market will continue to advance in the year ahead. Nevertheless, they do appear to lend weight to the favorable side of the weight of the evidence ledger. While anything can happen in the short run, the signals above suggest that long-term investors ignore any noise for now and continue to stay the course.