Momentum Builds: A Technical Spark for Stocks

Momentum Builds: A Technical Spark for Stocks

• The NYSE is on the verge of triggering a Zweig Breadth Thrust.

• This has happened 17 prior times since 1950.

• The S&P 500 averages a 28% return 12 months later.

The best buying opportunities always seem to be the hardest…

The investing environment has been unsettled over the past six weeks. In months that usually deliver one of the strongest stretches for the S&P 500 Index, returns have been all over the map. After hitting new highs in late October, the index dropped about 5% before ending November flat.

A big driver of the swings has been speculation around the Federal Reserve’s next move. In early November, several policymakers rattled Wall Street by hinting the Fed should hold off on cutting rates again in December. By month’s end, those fears eased as more officials suggested the central bank should keep loosening policy.

We can see the impact in the American Association of Individual Investors bull/bear sentiment indicator, which hovered near its lowest level since April…

But sentiment often lags. As I noted at the start, it’s tough to muster the nerve to buy when conditions look their worst. More often, retail investors head for the exits just as the market is turning.

Lately, though, the headlines have shifted. Optimism over lower borrowing costs has pushed short sellers to cover their bets. As the market rallied, momentum drew others back in. And according to Ryan Detrick at Carson Research, the move is close to triggering a rare technical buy signal for the S&P 500 — the Zweig Breadth Thrust. History suggests that when it flashes, stocks can climb a lot higher.

But don’t take my word for it, let’s look at what the data’s telling us…

For anyone unfamiliar, the Zweig Breadth Thrust is an indicator created by legendary investor Marty Zweig. He’s famous for having called the Black Monday Crash of 1987. He also co-founded the hedge Zweig-Dimenna in 1984.

The indicator is based on the sudden swings in New York Stock Exchange member companies’ shares. It focuses on the number of advancing shares following a steady decline. The formula is based on the 10-day Exponential Moving Average (“EMA”) of NYSE advancing issues, divided by the (10-day EMA of advancing issues) divided by the 10-day EMA of declining issues), times 100.

When the ratio moves from below 40% to above 61.5% over a 10-day span, the signal is triggered. It’s typically a turning point for the S&P 500. So, I ran a total return analysis (dividends reinvested) for the index following the trigger date. Since 1950, this has happened 17 times prior. Look at the results…

As you can see, I ran the numbers on a 3-, 6-, and 12-month basis. I then calculated the average return and success rate (the number of times a positive result was produced). The S&P 500 averages an 19% return six months later and a 28% gain one year later. Yet, what stands out even more is the 100% success rate.

The last time this momentum signal flashed was in late April. Since then, with dividends reinvested, the S&P 500 has climbed 16.4% over three months and 24.6% over six.

It’s worth stressing, though, the indicator hasn’t triggered yet. Momentum picked up late last month, but if it doesn’t confirm by this Friday, the cycle resets. Even so, the shift itself points to a more positive backdrop.

As the saying goes, history doesn’t repeat, but it often rhymes. If the Fed lowers rates again in December, it could help shore up a weakening job market, ease borrowing costs for households, and calm growth concerns. As those fears fade, capital should flow back into equities, fueling a steadier rally in the S&P 500.

Five Stories Moving the Market:

Japanese Finance Minister Satsuki Katayama said she sees no gap between the government and the Bank of Japan on their assessment of the economy, after the central bank chief voiced confidence in the outlook and hinted at a rate hike; she said the government also feels the economy is recovering modestly – Reuters. (Why you should care – the government and the Bank of Japan are likely trying to talk up the yen given recent weakness)

The U.S. will seek agreements with eight allied nations as part of a fresh effort to strengthen supply chains for the computer chips and critical minerals needed for AI technology, according to the top State Department official for economic affairs; the White House will hold a meeting with counterparts from Japan, South Korea, Singapore, the Netherlands, the UK, Israel, the United Arab Emirates, and Australia on December 12 – Bloomberg. (Why you should care – the White House is seeking to reduce dependence on China for critical minerals)

The search for a new Federal Reserve chair seems to be all but over, with President Trump appearing to favor longtime adviser Kevin Hassett; if Hassett does end up the nominee, it will be because he met Trump’s two key criteria: loyalty, and credibility with the markets – WSJ. (Why you should care – Hasset would favor easing interest rates more aggressively)

The U.S. Commerce Department has agreed to invest as much as $150 million in xLight, a chip technology startup tied to former Intel Chief Executive Officer Pat Gelsinger; the department’s Chips Research and Development Office — a part of the National Institute of Standards and Technology — has signed a nonbinding letter of intent to provide the funding – Bloomberg. (Why you should care – this is part of a broader push to boost domestic semiconductor manufacturing capacity)

U.S. manufacturing activity contracted for the ninth consecutive month in November, a decline manufacturers attribute largely to President Trump’s tariffs; the Institute for Supply Management’s manufacturing PMI came in at 48.2, a decrease from 48.7 in October – WSJ. (Why you should care – the slowdown in manufacturing activity is likely to increase pressure on the Federal Reserve to lower interest rates)

Economic Calendar:

BOE Financial Stability Report (2 a.m.)

BOE Meeting Minutes (2 a.m.)

Eurozone – CPI for November (5 a.m.)

Fed's Bowman (Board Member, Voter) Speaks (10 a.m.)

U.S. – JOLTS Job Openings for September (10 a.m.)

Treasury Auctions $75 Billion in 6-Week Bills (11:30 a.m.)

U.S. - American Petroleum Institute Crude Oil Inventory Data (4:30 p.m.)