The Market Just Did Something for Only the 20th Time Since World War II, and History Says There's a 100% Probability of Where Stocks Go Next
At the Fool, we preach the notion of Foolish Investing . This involves regular and dispassionate additions to your stock portfolio on a regular basis, a concentration in high-quality companies, and a long-term investing mindset.
But hey, looking at technical indicators to supplement our fundamental investing ethos couldn't hurt either, could it? Technical indicators may also be especially valuable in times like today, as investors debate whether the market has hit a bottom earlier this month after a brutal stock market correction over the past couple months.
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Fortunately for bullish investors, one technical indicator was just achieved late last week, and it has a 19-for-19 track record of predicting higher markets within six months and one year out.
What is the Zweig Breadth Thrust?
On Thursday, April 24, an indicator known as the Zweig Breadth Thrust was triggered for the S&P 500 index (SNPINDEX: ^GSPC) . This technical indicator was developed by investor Martin Zweig, author of a famous investing tome Winning on Wall Street in 1986.
The indicator is calculated by tabulating the change in the 10-day exponential moving average of advancing stocks against the total number of stocks in an index over a 10-day period. In the case of the Zweig Breadth Thrust, the indicator is triggered when the index, in this case the S&P 500, goes from below a 40% 10-day EMA of advancing stocks to a greater than 61.5% proportion of advancing stocks within a span of 10 trading days.
The indicator may seem complex and somewhat arbitrary, but if you think about it, the concept is simple. The rapid change in the number of advancing stocks indicates that a falling market with broad-based weakness has rapidly switched to a market with upwards momentum, but which is not yet "overbought."
A perfect record... so far
According to Ryan Detrick citing Carson Investment Research and Ned Davis Research on X, a Zweig Breadth Thrust was achieved last Thursday. This is the first ZBT since November of 2023, and just the 20th such instance since World War II. The indicator is very rare, as you can tell, with the extreme bearish-to-bullish sentiment change happening just once every four years on average.
As you can see below, when a ZBT does occur, stocks usually perform extremely well in the following period:
Following the previous 19 Zweig Breadth Thrust triggers going back to 1943, the S&P 500 was higher one month later 95% of the time, higher three months later 79% of the time, and always higher six and twelve months later, with median six and 12-month returns of 13.2% and 24.8%, respectively. Needless to say, those are quite healthy returns over such a time period.
Thus, if one has been sitting on one's hands waiting for more clarity on the tariff controversy and/or potential recession before buying stocks, this indicator may give you reason to put at least some of that idle cash to work in your favorite stocks right now.
But could this be the time the ZBT fails?
While the Zweig Breadth Thrust does have a perfect track record, it's also not a foolproof guarantee. Remember, technical indicators are just measuring movements in stocks, which serve as a barometer for investor sentiment. Technical indicators don't predict global trade wars spiraling out of control or stagflationary recessions, which are still possibilities.
Looking back at the prior examples, none of these breadth thrusts happened as a bear market was still unfolding, but rather after months-long bear markets had already occurred. The examples from the mid-1970s, for instance, happened after a dreadful bear market in 1973-1974. The example from 2009 happened after the massive six-month drawdown beginning in October 2008, which was the beginning of the Great Financial Crisis.
So, if we are going into a recession later this year as the result of the administration's tariff policies and a still-tight Federal Reserve, it's possible the ZBT won't work this time around. Right now, Wall Street analysts give a recession about even odds. But the recent action in stocks points to investors apparently disbelieving we will have an actual recession.
Investors may be anticipating a mere "growth scare," as what occurred before the January 2019 ZBT. That ZBT was triggered after the late 2018 19% stock market correction that stopped just short of a full-on bear market, but which ultimately didn't lead to a recession. Perhaps since that scenario occurred during Trump's first term under similar circumstances to today, investors are dusting off a similar playbook.
But this time, there is more uncertainty. Although the administration did give a 90-day "pause" on tariffs for trade negotiations to take place, we still don't know whether these deals will come to pass. Moreover, even if they do, the administration is still likely to maintain the 10% universal tariffs on most goods from most countries. So even in a best-case scenario where many trade deals are consummated, tariffs will still probably still be higher than they have been in the past.
So while the Zweig Breadth Thrust is a very positive sign that investors believe trade deals will be coming and recession will be avoided, neither of those conclusions is a certainty.
Overall, it's best to stick with a steady and dispassionate investing plan by adding to your portfolio in set allocations at steady intervals, rather than trying to guess where a market bottom may be... or whether it's already happened.
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