Thursday saw stocks close higher, with the S&P 500 completing a market downturn and continuing its winning run for three sessions. But as stocks aim to end a strong week, investors are getting excited due to the activation of a rare, positive technical indication.
Following President Donald Trump’s announcement earlier this week that tariffs on imports from China would shortly drop from their current level of 145% and that he was not contemplating a move to remove Federal Reserve Chair Jerome Powell, stocks plunged.
The wide nature of the rally was especially appealing to stock market bulls. The great majority of equities were involved, so much so that Thursday’s session set off what is known as the Zweig Breadth Thrust Indicator. This indicator was made popular almost forty years ago by the late Martin Zweig, a renowned market timer and investor.
SentimenTrader senior research analyst Dean Christians has provided the following explanation on it:
After being smoothed by a 10-day exponential moving average, the indicator calculates the proportion of NYSE advancing items to advancing and falling issues. When the indicator cycles from below 40% to above 61.5% in ten trading sessions or less, an alert is set off.
Christians clarified in a Friday note that the appearance of thrust signals amid a market decline frequently signifies that the overall trend is beginning to turn around. While history indicates that markets are often higher six to twelve months after the transfer, he added that short-term volatility is likely to remain, particularly given the ongoing uncertainty surrounding tariffs.
According to Fundstrat’s head of technical strategy, Mark Newton, the median return following a Zweig surge “tends to be quite positive following a period of abnormally high market breadth happening from extremely low levels.” Refer to the table below.
When considering 12-month forward gains, the performance is outstanding, especially considering that the S&P 500 SPX rose in each of the ten cases after a Zweig Breadth Thrust dating back to 1982.
There is more to think about, though, and technical analysts are quick to warn that investors might be in for a rough ride, at least in the near future.
“It’s appropriate to restate that weekly momentum is still negative, even though I believe this helps to establish that our April lows are in place. Additionally, Newton noted, “a lot of work is needed to help with weekly momentum and the improvement of the technical structure.” “At present, I view this as an intermediate-term bullish signal for U.S. stocks.”
Furthermore, SentimenTrader’s Christians warned that not all Zweig indications are risk-free. He specifically cited a growth scare-driven stock market fall in 2015–16, which may be compared to the current state of the market.
He pointed out that the S&P 500 would reach its 200-day moving average at 5,747 if it rallied at a rate comparable to the maximum gain of 4.8% in 2015 after a Zweig signal. After then, the S&P 500 experienced a maximum decline of over 9% (see figure below).
What could cause a retest situation like the one that occurred 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 stated.
In a Friday update, technical expert and McClellan Market Report editor Tom McClellan expressed his skepticism that Thursday’s Zweig surge would turn out to be a “stellar example of this signal.”
The market strength that set off the ZBT, in his opinion, is a “typical bear market countertrend rally,” which may quickly fade. Following seven sessions of bearishness, McClellan has been neutral for short- and intermediate-term trade cycles for the last two days.
He has been pessimistic about long-term trading strategies for some time, saying, “We are still in a bear market, and it has more time yet to run.”
