The Motley Fool advocates the principle of Foolish Investing, which emphasizes making regular and objective additions to stock portfolios, focusing on high-quality companies, and adopting a long-term investing approach.
Considering technical indicators as a supplement to fundamental investing strategies could also be beneficial, especially in current times where there is debate among investors about whether the market reached a bottom following a recent significant stock market correction.
For bullish investors, a technical indicator was triggered recently, demonstrating a perfect 19-for-19 track record of predicting higher markets within six months and one year.
Understanding the Zweig Breadth Thrust
On Thursday, April 24, the Zweig Breadth Thrust indicator was triggered for the S&P 500 index (^GSPC 0.74%). Developed by investor Martin Zweig, author of the 1986 book Winning on Wall Street, this indicator measures changes in the 10-day exponential moving average of advancing stocks compared to the total number of stocks in an index over a 10-day period. The indicator is activated when the index shifts from under a 40% 10-day EMA of advancing stocks to above 61.5% within 10 trading days. This signifies a rapid shift from a market with broad-based weakness to one with upward momentum, without being "overbought."
An Impeccable Record
According to Ryan Detrick, citing Carson Investment Research and Ned Davis Research, a Zweig Breadth Thrust was achieved last Thursday—the first since November 2023 and only the 20th occurrence since World War II. The indicator is rare, marking significant shifts every four years on average. Historically, once triggered, the S&P 500 was higher one month later 95% of the time, higher three months later 79% of the time, and consistently higher six and twelve months later, with median returns of 13.2% and 24.8% over six and twelve months, respectively.
This may encourage investors who have been hesitant due to tariff controversies or potential recession risks to consider investing some of their reserves into preferred stocks.
Potential for Failure
Despite its perfect track record, the Zweig Breadth Thrust is not foolproof. Technical indicators measure stock movements that reflect investor sentiment but do not account for external influences such as escalating trade wars or stagflationary recessions.
Past breadth thrusts occurred after prolonged bear markets, like those in the mid-1970s and post the 2008 financial crisis. Currently, analysts give even odds for an impending recession due to the administration’s tariff policies and a tight Federal Reserve, although recent stock activities suggest skepticism about an imminent recession.
Investors might expect a "growth scare," similar to the pre-January 2019 ZBT following the late 2018 market correction. However, uncertainties remain higher this time. Despite a 90-day tariff negotiation pause, the resolution of deals is uncertain, and even if resolved, tariffs are likely to remain higher than before.
While the Zweig Breadth Thrust indicates optimism for upcoming trade deals and averted recession, these outcomes are not guaranteed. Maintaining a disciplined investing plan, by making regular portfolio additions, may be more prudent than attempting to time the market or identify a market bottom.
