The Zweig Breadth Thrust (ZBT), developed by the late Marty Zweig, a prominent figure in financial media and author of “Winning on Wall Street,” is the focus of this article. And although the thrust indicator isn’t discussed ad nauseam in his book, it’s one worth considering for timeless market insights.
The ZBT, which utilizes the 10-day exponential moving average (EMA) of NYSE advances divided by NYSE advances plus NYSE declines, triggered NYSE stocks in early November. That indicator is outlined in detail in Greg Morris’ “Encyclopedia of Breadth Indicators.”
So, what does this indicator say about stock market predictions for next year?
The Sudden Buy Signal From ZBT
The recent rapid and broad-based rally in the stock market activated a rare buy signal known as the ZBT. That signal, triggered on Nov. 3, is the 18th occurrence since 1945. Historically, following this signal, the S&P 500 has recorded a 100% higher one-year return, averaging around 23%.
This rare signal occurs when the market swiftly shifts from oversold to overbought in less than two weeks.
In all 17 previous instances when this indicator was activated, stocks experienced gains both 6 and 12 months later, with average returns of approximately 15% and more than 23%, respectively. That implies the ongoing stock market rally, marked by the activation of this indicator, suggests a strong likelihood of a 20%-plus surge in the next 12 months.
Experiencing two ZBTs within 12 months is exceptionally rare, having occurred only in 1962 and 1974/75. Following the second ZBT in 1962, stocks surged nearly 20% over the next 12 months. Similarly, after the second ZBT in 1975, stocks rallied almost 25% over the following year. This recent occurrence strongly suggests the potential for a substantial stock market rally in 2024 — perhaps exceeding 25%.
Final Thoughts
Yet, something is amiss — Nasdaq stocks. Zweig likely favored NYSE breadth during development, reflecting the dominance of the big board at that time. Considering the Nasdaq’s current significance, a modern breadth indicator should encompass both Nasdaq and NYSE stocks, including diverse market caps — maybe S&P 1500 stocks would serve this purpose.
Despite ongoing wars, high inflation, soaring interest rates and political divisions, the stock market rallied. The adage, “Bull markets are born on pessimism” and “grow on skepticism,” holds true. In the face of widespread pessimism and skepticism, smart money seizes opportunities and invests heavily in stocks. Ignoring this rally may lead to missed opportunities.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
