Freshly squeezed market commentary & analysis
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 (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)
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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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.
“If there is interest, I will have some followup comments on this subject in the next few days”.
You’ve got my attention.
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.
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.
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