We talk a lot about breadth because ‘participation’ to the upside is vital for a sustained move higher. We want to see the majority of troops following the general!
Additionally, the start of new bull markets are marked by breadth thrusts. These thrusts are indications that the market has moved from oversold to one of strength. The chart below is one such indicator developed by Marty Zweig which measures the 10 day moving average of stocks advancing versus stocks declining. When the indicator goes from a very low number, usually below 40, to a very high number, usually above 63, this indicates the start of a new bull market. The blue lines on the chart show just how well this worked in 2019 and 2020 as breadth went rapidly from 30 to 65 at the beginning of those advances.
A few months ago we were discussing the possibility of a new bull market as once again we saw breadth thrusts above 63. These thrusts occurred in July and are marked by the red lines. In retrospect, maybe the market wasn’t ‘oversold’ enough to sustain a new bull market; or better said we did not see true capitulation. However, over the last few weeks we may have seen just that as the indicator printed a below 30 reading consistent with readings at the bottom of the 2018 and 2020 bear markets.
A lot has been printed today about the great rally on Monday and Tuesday, and we agree it’s a great start. But we want to see another thrust register to have more confidence this isn’t another bear market bounce.
Sean Dillon, CMT, CFTe
SVP, Investment Strategies
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