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Explaining The Unstoppable Momentum Of The Market at Trader’s Narrative





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This is a guest post by Wayne Whaley, CTA:

Like many other technical analysts, I’ve written a great deal about the unprecedented three traditional breadth thrust that occurred in 2009. As a quick refresher: a breadth thrust is defined in the stock market technical encyclopedia as a 10 day period where the sum of daily advances exceeds the number of declines by a 2 to 1 margin (normally on the NYSE index).

As I mentioned last year, this indicator has an impressive record at predicting the intermediate direction of the market. We observed 3 such signals in 2009: on March 23rd, July 23rd and September 15th.

There is nothing magical about using a 10 day moving average other than that is the number of fingers that most of us are born with. On March 8th, 2010, we experienced a slightly different version of the breadth thrust signal, this time on the 20 day moving average.

Another way to measure breadth is to look at the number of advances divided by the total number of advances and declines (ADT). A 2:1 advance decline ratio would equate to 66.67% ADT. A 2:1 measurement over a month, is difficult to obtain but I have found that over a 20 day period, a reading of above 62 ADT is a very reliable indication that the market has solid intermediate breadth.

Below are the 10 occasions since 1970, when the 20 day average ADT reached 62, using standard NYSE data on what is now some 3200 issues trading on the Big Board. All signals within 20 days of a previous signal were considered a repeat.

advance decline total ratio datatable Apr 2010

This has an impeccable record of 9-0 with an average annual return of over 22.24% (note that the August 2009 signal is still ongoing and hasn’t completed 1 year). The 10th signal on March 8th 2010 isn’t doing too bad either, up 5.2% in the first 5 weeks of its arrival.

Many traditional short term sentiment indicators suggest that this market is due for a pullback. It is likely that the reason we aren’t getting it, is the tremendous momentum that the market continues to roll out. Recall that during this same period in March that this 20 day breadth thrust was observed, we witnessed two 9:1 up to down volume days within a one month period as well, which also has a perfect record of forecasting the 12 month positive direction. We may get a pullback, but I’m not inclined to look for more than a 5%.

I find it interesting that when the rally was launched in March of 2009, those that were fortunate enough to be in cash at the time, looked for a retest of the old lows to get in. By the fall, they were looking for a 10% correction. By the end of the year, investors on the sideline were looking for a 5% pullback and it seems that just recently, the retail investor is finally willing to start dollar cost averaging their hoards of cash back into the market at whatever price. Let’s see if they are responsible for another six month push upwards.

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11 Responses to “Explaining The Unstoppable Momentum Of The Market”  

  1. 1 Peter

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    Hi, Wayne,

    Thanks for the insight. Would you mind telling me how this ADT ratio is calculated? Applying MA10 on NYSE Advance - Declines seems not the one you’re talking about. And I tried Zweig Breadth Thrust where it takes a 10-day moving average of the number of advancing issues divided by the number of advancing issues plus the number of declining issues. And again it doesn’t show the readings you refer to. So could you tell me exactly how this ADT is calculated? Thanks.

  2. 2 Babak

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    Peter, I think what Wayne is doing is taking the daily adv/decline data and putting it in a formula like this: advance/(adv plus dec) and then taking a 20 day moving average

  3. 3 Peter

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    Hmm, looks so, thanks. But be a 2:1, the ratio should be at least above 67, shouldn’t it? 100 / 3 * 2 = 66.67.

    By the way, Babak, your blog is great. I should’ve said thank you long long time ago but at that time it’s very difficult to put a comment on your blog, got rejected many times before I finally gave up.

  4. 4 Wayne W

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    Peter,
    ADT is my personal abbreviation for Advance Decline Thrust signal where ADT=(Advance)/(Advance Decline) for whatever moving average time period you are studying. You can get excellent ADT thrust signals from 3 to 20 day periods, but the threshhold naturally increases as the number of days decreases. The threshhold for the traditional 10 day has historically been referenced around 66-70 on the NYSE, depending on whether you want 95% historical accuracy or 100% As I briefly mentioned in my post, 20 day ADTs of 66.7 are extremely rare, but the 20 day ADT above 62.0, is equally significant. Nowhere has it been cast in stone that 10 days be the mandated time frame for this or other tape studies. The proof is simply in the pudding. The recent 20 day signal we received on March 8, appears to have been positively received so far by the market. Also there is no reason that other indexes can not be used as well for any tape study. Whatever makes you money. It is not rocket science.

    Something is pushing the market higher, even bulls are confused by the fact that Trin, Putcall ratios, price from moving avgs, etc, are as overbought over the last 2 weeks as they have been in years, but market forges higher.

    In case the above is not clear, below is an example of a 5 day ADT calculation taken from a previous paper I wrote on the subject that might help clarify.

    This Advance Decline Thrust (ADT) statistic can theoretically range from 0 to 100 with 50 being the measure of equilibrium. For an example of the calculation, ADT on March 18, 2009 was instrumental in launching the 2009 rally in equities and could be calculated as follows.

    Five Day ADT Calculation on March 18, 2009

    YYMMDD ADV DEC
    090312 2864 0284
    090313 1976 1118
    090316 1767 1338
    090317 2422 0669
    090318 2510 0601

    Sum of Advances = 2864 1976 1767 2422 2510 = 11539
    Sum of Declines = 284 1118 1338 669 601 = 4010
    ADT = A/(A D) = 11539 / (11539 4010) = 74.21%

    There were similar 10, 15 and 20 day signals at this time, as the 2009 Breadth Thrust was draconian in nature.

    I will try to be more clear in the future, but in much of my tape discussions, I will also often reference Up/Down Volume Thrust UDT and S&P Price Thrust SPT.

    I hope that clarifies.

  5. 5 Peter

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    Wayne, thanks, I’ve got your idea. Thanks so much!

  6. 6 Wayne W

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    Babak,

    In rereading this today, I should have probably pointed out sooner in the discussion that we experienced a bullish 20 day ADT signal of 62 on March 08, 2010, which was the crux of the post. I hope readers picked up on such.

    10 day equity callput at new high 5 year high today.

    Number of new highs at 609, also a new high.

    April 15th (tax day) is 22-8 over the last 30 years.

  7. 7 Alex

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    Wayne,

    I downloaded the historical prices of advance and decline on my Bloomberg and I setted up the formula U provide on Excel. Unfortunatley I came with just little different results in the 20 TD Average before 1970:

    Jan 22 1970 - 50.66%
    Dec 22 1970 - 58.86%

    On Dec 18, 1970 I have 60.21% ad the highest level in 1970. So, for Bloomberg data, is better to take the 61.73% of 21 Jan 1971 (next day was 62.06%).

  8. 8 Wayne W

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    ok, ill try to double check against yours when I get a break. I have found lots of discrepancies in data providers. For the last 17 years, I always deferred to the WSJ data and then double check against the weekly data in Barrons, but I can’t say for sure where the 70’s data came from.

    I’ve got a new tape model that I’m working overtime on that will combine all the work I have been sharing over the last 12 months into one indicator. Hope to have it completed within weeks with the ability to display in chart form against the market.

  9. 9 Alex

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    These are the dates with ADT greater than 61.5% (Source Bloomberg) in a 10 month future timeframe:

    27/01/1967 61.64%
    21/01/1971 61.73%
    21/12/1971 61.88%
    22/01/1975 62.78%
    08/01/1976 62.20%
    13/12/1976 62.00%
    03/09/1982 62.76%
    30/01/1985 62.01%
    06/02/1991 62.20%
    03/04/2009 61.82%
    08/03/2010 61.59%

  10. 10 Wayne W

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    alex, if you don’t mind sharing an email address, i’ll correspond with you some more on the subj.

  11. 11 Alex

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    These are the MAE% (Maximum Adverse Excursion) of all trades in a whole time frame of 210TD (10 months) after the signal fires on (based on ADT greater than 61.5%, my Bloomberg data source):

    27/01/1967 0.00%
    21/01/1971 -2.52%
    22/01/1975 0.00%
    08/01/1976 0.00%
    03/09/1982 -0.14%
    30/01/1985 -1.48%
    06/02/1991 -0.48%
    03/04/2009 -2.47%
    08/03/2010 -3.89%

    The May low looks like the last ones based on this reasearch.

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