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Does The Stock Market Owe Us A Summer Rally? at Trader’s Narrative





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The following is a guest post by Charles H. Dow Award winner, Wayne Whaley (CTA) of Witter & Lester. If you would like to be privy to his daily market comments and model ratings via daily email, free of charge, email him at wayne@witterlester.com with the subject title “ADD ME TO DAILY EMAIL”.

I was updating a table of statistics on the Traditional Breadth Thrust Indicator for a project I’m working on and as I was perusing the updated data, a couple of observations came to mind that have some relevance to this summer’s market.

What I call the Traditional Breadth Thrust Indicator is simply any ten day period where the number of daily advances on the NYSE lead the number of declines by a 2:1 ratio. The signals are rare, with one occurrence every 3.55 years on average, but when they occur they are worth noting. The table below shows the 17 signal occurrences since 1950. The results speak for themselves with a perfect 17-0 record six months after a signal.

Traditional 10 Day Breadth Indicator & the S&P 500 Index
10 day breadth indicator S&P500 Jun 2010
(Note the green highlighted data is up to June 22nd, 2010)

There is a long list of observations that can be drawn from this data table. Especially relevant to today’s market and worth nothing is that the last signal experienced on September 16th, 2009 is behind the eight ball in terms of performance, especially at the 12 month time frame. The current average annual performance for all 17 signals is 21.13%, yet the last signal is up only 2.48% and if the signal were to expire today, it would end up 16th out of the 17 signals in terms of annual performance.

The last signal’s subnormal performance is even more surprising when you take into consideration that it is a repeat signal. Below are the results of the previous three signals that were the second to occur within a six month time frame. The forward S&P 500 results improve over all three time frames vs. the single signal results. The double signals are interesting because each occurred over four completely different decades and they launched that decade’s major multi-year bull market. Whether that ends up being the case for the fourth signal is still to be determined.

Traditional 10 Day Breadth Indicator & the S&P 500 Index
(Second Signal within 6 Months)

10 day breadth indicator second signal Jun 2010

But back to the question of the day. The last signal’s annual performance (2.48%) is currently 18.65% behind the single signal average and 23.9% behind the double signal average with almost three months left on the clock. Is it possible that this could be the second losing signal out of 17 (on an annualized basis) or does the market owe this breadth thrust indicator a summer rally?

I’ll let you draw your own conclusion as to what the odds are of making up some portion of the performance deficit by September 23rd. If there is interest, I will have some followup comments on this subject in the next few days.

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9 Responses to “Does The Stock Market Owe Us A Summer Rally?”  

  1. 1 hermione gingold

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    A necessary postscript to this article is that the market owes us nothing.

    How many of these breadth thrusts were followed by a head and shoulders formation, btw? Not a trivial question - I’d really like to know. If there have been 2 or more, then perhaps the market DOES owe us a summer rally?

    But given the lackadaisical volumes recently, I bet the number of your breadth thrusts that were followed by a h&s is 0. Until this one.

  2. 2 Rod

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    “If there is interest, I will have some followup comments on this subject in the next few days”.

    You’ve got my attention.

  3. 3 mike

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    I expect a really nice rally starting tonight or early tomorrow and lasting until mid July. I think we will have a devastating low (940 or so) by late July before commencing with a huge rally ( 1200 ) from there into early Fall. After that it is lights out for the market ( low 800s) until mid- summer 2011.

  4. 4 Wayne W

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    Rod,

    I started out this morning working on some additional research and comments on the subject and market conditions intervened. I had some interesting followup but couldn’t get it put together. I’ll give it another shot tomorrow. Monday at the latest.

    Hermione,

    1. I probably should have put more thought into the title. The question really was “Does Breadth Thrust promise us a Summer Rally.

    2. Although most readers are familiar with my outlook, the article was written more of posing the question for discussion.

    3. Although, this the 17th thrust signal is struggling, I would hate to try make a living shorting breadth thrust.

    4. Those that are reading my daily comments are aware that I was cautious of the market in this, the week after the June option expiration.

  5. 5 Oexrex

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    Mr Mkt is on the edge of panic but I am/will not initiate a trade until I see the ” whites of their eyes “.

    During college spent in bacteriology class we gram stained slides to better see specimens. The criticism I have for bloggers and media guests is similar to gram staining. Everyone is focused too micro because they are using the same lens while examining their special speciman

    Perhaps they should use different levels of magnification to determine if the different levels are in sync

  6. 6 Alex

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    Hello Wayne,

    for 10 Days Traditional Breadth Thrust Indicator signal or “any ten day period where the number of daily advances on the NYSE lead the number of declines by a 2:1 ratio” u mean (formula) counting when you have 10 consecutive days with [ADV/(ADV DEC)]*100 >=50 ?

  7. 7 Wayne W

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    Alex
    the original thrust indicator the Dr. Martin Zweig introduced in his book was based on a 2/1 ratio. I am sure he uses a more complicated formula in his actual analysis, as do I. I define ADT to be the the Advance Decline Thrust formula, where as you mention ADT=100*(adv)/(adv dec). A 2/1 ratio would equate to any ten day period where ADT is greater than 66.666. For example 2000 advances and 1000 declines would yield
    ADT = 100* (2000)/(1000 2000) = 66.666

  8. 8 OntheMoney

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    Wayne, thanks for another well-researched and thoughtful post.

    On a related theme, I do seem to remember a piece you put up here not long ago - I think it was regarding 9-to-1 Up days - where you added that a large number of such upthrusts in close proximity (four or more I think you said) was not actually a bullish signal. Didn’t we have a bunch of them recently at the May/June lows? I also remember (I’m looking at Jason Geopfert’s archived report as I write) there were two 90% Up volume days in one week in November 2007, which suckered a number of bulls including yours truly back into the market just as it was getting ready to dump.

    The suggestion I’m making is that these were exhaustion signals rather than the kind of breadth thrusts which kick off a another up-leg. The lacklustre price action now is, it seems to me, not the type you see at the end of a healthy correction in an ongoing bull market. The pullbacks are too deep. It reminds me of the feeble rally in August 2008, frankly.

    As a trader I obviously don’t go on ‘feel’, but apart from your breadth thrusts my various indicators are solidly negative so right now I don’t see how I can go long. Sentiment on most measures is pretty negative, which ’should’ support a rebound, but again, there’s no immediate follow through in price - just like the apparent sentiment ‘lows’ during the bear market when the sentiment just kept on going lower as the market tanked.

    If you have technicals aside from breadth which you feel support the bullish case I’m certainly open to being persuaded - but, combined with the deteriorating US growth picture and big-time European problems, I am inclined to believe the top for this year was in April.

    Thoughts?

  9. 9 Wayne

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    OTM.
    I have tremendous respect for Lowry Reports and Paul Desmond, however I find the 9/1 stuff to probably be a little over advertised in importance. If Im gong to use up/down volume I would personally rather look for the 5 day up/down signals that I we haven’t had in a while. My daily model spits out each day the pattern of the last four nine/one signals and if they appear to be statistically significant, I will pass them along, mostly as a conversation piece as they get no weighting in any of my models. I am not really a student of the 9/1s, but my observation is that they have some modest bullish bias and the 1/9s very little, possibly because there are twice as many occurences of the later. There just simply seems to me, to be better sources of thrust measurement. But Lowry seems to be able to read them in context of other factors and more power to them.

    I did some followup research today that I put out in my daily email comments. My thougth today is that the most significant tape event that the mkt has going for it right now is the five day ADT capitulation reading on May 20th of 20.5. Readings below 21.5 are 10-0 a year later for an avg return of 26% with almost all of that 12 mt performance coming in the last 9 months usually after the retest, which in this case we got in classis style on June 08.

    On the bearish side, I don’t consider myself to be technician, but just looking at the chart, a retest of the lows would not be good here, as it would be the third test of that level and would not be promised to hold. The bulls need an independence week rally to clear up a lot of concerns. But the market would look so cheap to me at 1040 from a valuation view point, given what I expect to be earnings in a couple of weeks that should again beat expectations.

    I think the bulls just get a little impatient here because the mkt has stopped going straight up. We are back into a more typical sideways to up mkt, possibly like 75-76 The flashcrash event should provide the backdrop or wall of worry needed for the mkt to gradually resolve itself to the upside. Just one guy’s opinion and I may look silly before the year is over and it won’t be the first time.

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