The Dark Side of the Zweig Breadth Thrust

The Dark Side of the Zweig Breadth Thrust by drewby4321 on

The Zweig Breadth Thrust (ZBT) is an indicator developed by Martin Zweig. The indicator shows how quickly the New York Stock Exchange ratio of advancing (number of stocks with gains) and declining (number of stocks with losses) goes from poor to great. The underlying principle is that there is a rush of liquidity in the market that benefits a wide number of stocks and shows the beginning of a bull run. You can build the indicator by dividing ADVN (advancing issues) by ADCN+DECL (total issues) and multiply by 100. In other words the percentage of issues that are advancing. Then apply a 10-day Exponential Moving Average ( EMA ) to this number. The indicator is oversold when it drops below 40% and is overbought when it goes above 61.5%. The “Thrust” occurs when it goes from oversold (below 40%) to oversold (over 61.5%) within a 10-day period.

What does the Thrust mean? It is a leading indicator of a great bull run about to happen. There have only been 14 thrusts since 1945, but with an average of 24.6% gains in the next 11-12 months after the thrust!

Great! So what’s the dark side? Someone mentioned on fintwits a few weeks ago that the Zweig Breadth Thrust almost occurred, barely missed, but framed it as a bullish sign. By default, I’m a bull and love great news, but I also like to test assumptions. So I backtested this comment. What happens when the Zweig Breadth Thrust almost occurs, but does not occur. So I tested instances in historical data that the indicator went from oversold to almost overbought (above 60.59 within 10-days) but not above the threshold of 61.50. I played with the 60.59 to isolate to a reasonable number of cases for study. The indicator will at times go over the 61.50 a few days later, but does not do so within 10 days.

On the chart, you have two views. The top is the indicator with two different colored circles. The white circles mark actual Zweig Breadth Thrusts. You can go look at those and see that they do in fact have huge gains over the next several months. The most recent was this year on May 21. We’ve all experienced the amazing gains that have occurred since that time. The yellow circles mark the times the indicator almost made it but backed off.

The bottom chart is the NYSE composite index, taking into account the breadth of the market’s gains and losses. The yellow lines correspond to the yellow circles in the indicator chart. You can see in most cases that there is a short pump from the increasing amount of advancing stocks. But overtime, the failed attempt at Thrust eventually results in a lower low.

I find these types of things interesting. But don’t overweight the estimate or the prediction. It’s just another thought to chew on and balance with what else is going on. There is a tremendous amount of liquidity being created by government stimulus and the low bond yields. It’s a very unique time historically in the market. So there could be more and more upside. At the same time, there’s a lot of danger in that liquidity flowing into failing sectors that have no guarantee of turning positive in the near term. Eventually, the money comes back out, consolidating into a smaller breadth of areas and then eventually into alternative investments (if those become attractive).

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