Fun with analogs and breadth thrusts

There was an amusing joke tweet that circulated, which overlaid the 2020 market experience over the 2008 bear market and projected a downside target of 125 for SPY. If anyone saw that, it was a joke and not intended to be serious analysis.


Nevertheless, analogs can be useful in analyzing markets, but with a caveat. As the adage goes, history doesn’t repeat itself, but rhymes. Traders who use analogs often expect the market to follow every single squiggle of the historical analog, which is unrealistic.

Historical analogs can be useful as a template for market action. The 2008 market pattern suggests that after an initial shock, the market rebounds and trades sideways for some time before falling to a final low. As a reminder, I made a bear case in my recent publication (see Why the market hasn’t seen its final lows) that stock prices are vulnerable to further downside risk based on a review of long-term market psychology, technical analysis of the cycle, challenging valuations, and the behavior of smart investors.  The downside potential for stock prices is considerably lower than what they are today.


Similarly, the 9/11 exogenous shock is also a useful template for thinking about market behavior. The economy was already in recession in 2001, but the market did not bottom until a year later in 2002. Things are different today, the economy was humming along and poised for a solid but unspectacular 2020 when it was hit by the dual broadsides of the COVID-19 pandemic and an oil price war. Stock prices skidded after the 9/11 attack, recovered to trade sideways until it fell into the final lows in late 2002.


I would also point out that I reviewed past major market bottoms four weeks ago (see 2020 bounce = 1987 or 1929?), I concluded:

After an initial bottom:

  • The market either forms a W-shaped choppy bottom, or a bounce and retest
  • The retest may not necessarily be successful. Failures of retests have usually occurred when the economy was in recession.

Every market is different, and your mileage will vary. The lessons from these bear markets indicate a period of choppy range-bound price action. No one has a crystal ball that can tell you whether the advance will halt at the 50% retracement level, or if it will continue.

Breadth Thrusts, reconsidered

As an update to yesterday’s post (see A Dash for Trash countertrend rally), one reader pointed out that my analysis of the Whaley Breadth Thrust (WBT) had referred to the wrong table from Wayne Whaley’s publication. The history of WBTs was on table 2, not table 5.


Here is a revised analysis of the key differences between the WBT and my preferred signal, the Zweig Breadth Thrust (ZBT) in 2009. There were three WBT signals and one ZBT signal during this period. As the ZBT Indicator (bottom panel) shows, WBT signals only require strong momentum that moves the ZBT Indicator into overbought territory, while the ZBT signal requires the combination of an oversold condition and strong momentum in a short period. During this period, the first WBT signal failed, the second WBT coincided with the ZBT signal, and the third, while successful, was not as strong as the ZBT signal.


Here is the ZBT Indicator today, which has moved into overbought territory but not within the 10 day window required for a buy signal. By contrast, the WBT model is on the verge of a buy signal.


Of the three WBT during 2009, one coincided with the ZBT signal and worked well. Of the other two, one failed, and one worked, though subsequent momentum was not extremely strong. We can conclude that the WBT model is less rigorous than the ZBT model, and therefore more prone to failure and more false positives.

As well, Mark Ungewitter compiled the track record of WBT buy signals since 2002. If we we exclude the WBT signals that coincided with ZBT buy signals, the track record is mixed, with a win rate of 50%.


Brett Steenberger also offered a slightly different perspective on the current strong momentum in a Forbes article:

According to data from the Index Indicators site, over 90% of stocks in the Standard and Poor’s 500 Index closed above their 5, 10, and 20-day moving averages this past Thursday! Moreover, if we look at the shares in the Standard and Poor’s 600 index of small caps, we see the exact same pattern. And the Standard and Poor’s 400 index of mid cap stocks? The same thing: over 90% trading above their 5, 10, and 20-day moving averages. In other words, over the past two weeks, it’s not just that the indexes were higher: almost every single stock in every single market was bought! In a very real sense, the buying has been as broad and extreme as the prior selling.

Steemberger identified 10 occasions of strong buying, namely January 2, 2009; March 23rd and 26th, 2009; March 5, 2010; September 13, 2010; July 1, 2011; August 31, 2011; October 24th and 27th, 2011; October 31, 2014; March 11, 2016; and January 18, 2019. He went on to analyze three past episodes because “they were the dates of broad market rallies where the overall market volatility was similar to today’s market (VIX > 30)”. These were: January 9, 2009, which roughly coincided with the first WBT that failed in our 2009 study; March 23 and 26, 2009, which occurred at about the same time as both the very successful WBT and ZBT; and August 31, 2011, which is shown in the chart below. The 2011 period also saw a ZBT buy signal in October 2011, whose subsequent returns were positive but weaker than usual, and a false breadth thrust observed by Steenberger in late August when the ZBT Indicator went overbought but the market failed to follow through.


Steenberger went on to tentatively conclude that these signals tend to be better long-term investment buy signals than trading signals.

My main takeaway is, if you are going to trade on breadth thrusts, trust the real thing and only buy ZBT signals. The ZBT model has a more restrictive criteria which raises their short-term success rate. By contrast, other strong momentum breadth signals tend to be more hit and miss affairs, even in the current environment where the VIX Index is highly elevated.


51 thoughts on “Fun with analogs and breadth thrusts

  1. Cam, is there an equivalent ‘down thrust’ indicator similar to the ZBT? If so, how is it computed?

    1. Markets behave differently at tops compared to bottoms. I’ve never heard of anyone using a downthrust as a technical indicator. Such episodes are likely to be contrarian bullish because they indicate panic and capitulation.

      1. Investech, uses this idea, using their own proprietary model, to discern a bottom of the market (seller exhaustion).

  2. Walter Deemer

    ‘Market failed to generate a Whaley Breadth Thrust. Today’s 5-day ratio was 72.93% and threshold is 73.67%. 5-day window of opportunity now closed. Always amazed how “sure-thing” stuff like this can still manage to run off the rails at the very last minute.’

    1. Key assumption is there is no second wave of infections:

      “A combination of unprecedented policy support and a flattening viral curve has “dramatically” cut risks to both markets and the American economy, strategists including David Kostin wrote in a note Monday. If the U.S. doesn’t have a second surge in infections after the economy reopens, equity markets are unlikely to make new lows, they said.”

      1. How could there not be a second or multiple waves until a vaccine is found and administered to most Americans!

        We still have 1.36M active cases and God knows how many asymptomatic cases. New cases, though down a lot, are still in triple digits. They won’t go away over the coming weeks.

        If the economy re-opens without extensive testing and tracing, it will come back again.

        You just need one person with a virus to start the whole process again.

        1. One study I read said that only 6% of those infected have been identified as such. That means 94% of those infected are walking around not knowing they are carriers.

          1. Wow! I was using a figure of 10% (a guesstimate). 6% is even worse.

            How can GS make this assumption when it is most certain not true? The virus is already re-emerging in East Asian countries with far more draconian controls, and testing and tracing regimes.

            I think we will open up the economy. If, and a big if, the spread slows down because of warm weather, we’ll trudge along over the spring and summer. Come winter, we better be prepared.

          2. Iceland has done mass testing and about 50% of people who are tested positive are asymptomatic.

          3. If only 6% are identified in the US, that means that the total infected count is 100 / 6 * 600,000 = 10,000,000 people. A big number to be sure, but only 3% o the US population.

            Only 97% to go!!!!! Better get the skates on with the vaccine.

        2. The more number of infected cases, the bigger the “herd” immunity. This is how humans stay disease free. Vaccination programs create herd immunity (not just individual immunity) and achieve a two fold goal. second wave of Corona infection may rear its ugly head, but by then, herd immunity may be much stronger. What would matter is the severity of the second wave. Though no proof exists, such herd immunity may provide cross protection against the common flu (do not quote me on this).
          We do not know everything about this new agent and all the estimates are just that, guesstimates.

      2. What about the falling EPS that will likely remain lower for many quarters (past q1 and even q2) even if there is no second wave?

        Does Kostin think that’s already priced in?

        1. Many sell-side analysts and investors are already looking past 2020. They are looking at 2021 EPS estimates. 2020 is a lost year from earnings perspective.

          1. Consensus top-down 2021 estimate is around 150. So a year-end S&P 500 target of 3000 implies a forward P/E of 20.

            That valuation sounds ambitious.

      3. If there is a second surge it may be a mutated form of the virus. Virus’ want to keep their host vectors alive as long as possible so consequent forms are often less virulent. Also, doctors will have experience to know how to better treat cases (new report on this today in NYT) and we may well have several new drugs available by then.

    2. “There are 22 “chief market strategists” at Wall Street’s biggest banks and investment firms. They work at storied firms such as Goldman Sachs and Morgan Stanley. They have access to the best information, the smartest economists, and teams of brilliant analysts. They talk to the largest investors in the world. They work hard. They are paid lots of money.”

      “You won’t be shocked to learn their track record isn’t perfect. But you might be surprised at how disastrously bad it is. ”

  3. All this talk of a ‘second wave’ of infection spread after lockdown lifts reminds me of 2010.

    Mortage defaults had already crashed the market, and the recovery started. But lots of smart people insisted there would be a second wave of defaults coming that would take down the market once again.

    here’s an example (just something I googled up), case you don’t remember: Note the ‘second wave’ chart.

    I have no idea what will happen after lockdown lifts. Of course it is different this time.

    1. Like El-Erian said there are a lot of unknowns how the disease and economy are going to evolve. In these uncertain times investors make mistakes but which kind of mistakes can they handle (e.g. mistake of missing the rally or mistake of going in much too early). As a bear what keeps me up at night is that there are hundreds of treatments being tested which should be faster than testing vaccines. If any one of those treatments are effective then it could potentially ruin my bearish positions.

      1. I think what’s important here are consumer surveys that predict behaviors in the aftermath of a lockdown. Like how likely are people going to go back to Disneyland, a bar, or an NFL match. How likely are they going to make big item purchases, etc.

        1. Fox Biz has been displaying a poll that shows 72% saying they won’t go to an NFL game until there is a vaccine available.

          1. Thanks Wally. That’s bad. Got the impression NFL fans would be some of the more rowdy and macho people. Got to adjust my glasses a bit.

    1. Yes, there are models that say the human race may be wiped out, “under some circumstances”.
    2. On this Humble Student platform, circa December 2018, we were discussing 2100 on the S&P 500 as the next level below 2350. We never tested that level.
    3. The 2350 low of December 2018 was a “side lobe” in the graph. A “side lobe” in a graph is a downdraft (or a price spike) that is a one off needs to be discounted/ignored, as a remote or low probability event. The March 2020 bottom of 2200 may also be a “side lobe” in the graph.
    4. We have been speculating “inflation” in Cam’s previous missive, but truth be told, we have been battling serial deflation since year 2000.
    5. To Wally’s point above: “I think what’s important here are consumer surveys that predict behaviors in the aftermath of a lockdown. Like how likely are people going to go back to Disneyland, a bar, or an NFL match. How likely are they going to make big item purchases, etc.”.
    What is the probability Americans will stop spending?
    Here is my point: Let us try and put probabilities of what we are writing. So, what is the probability of 25% unemployment in the US in the next few months?
    What is the probability of US GDP hitting say 0% or say 1% in the next quarter?
    What is the probability of S&P 500 hitting 1700 in the next 12 months?
    Let me reframe the above questions:
    What was the probability of a 30% loss when S&P 500 was at 3400, with low inflation, low interest rate environment and valuation that was in the historically highest decile?
    So, with the above question, here is the corollary: What was the probability of another 30% loss, after the initial loss of 30% in the absence of the pandemic?
    My last question is rhetorical, but hints at what may happen if the pandemic sunsets in the coming months.


      Here are more doomsday sayers, that talk about possibilities, talk about “models” but no one seems to be sure.
      To be sure, let us try and ring fence the probabilities. This pandemic is likely a hundred year storm. We can only go by historical perspectives like the 1918 Flu pandemic (and subsequent Wars, Mers, Ebola mini episodes). So, a Black Swan event is probably just going to be that.

      1. I can’t say much about models or charts, but I know behavior in/after a crisis, having grown up in a 3rd world country.

        My view is, there will be very little consumer spending for a few years, and companies will not be hiring.

  5. I’ve stopped out of my short position from last week.

    Sitting out on the side lines for now. The tape just doesn’t seem to be reacting to bearish news atm.

  6. Is it just possible that sentiment, government rescue packages, Fed QE and booster in chief Trump can overcome all bad news and defeat the corona virus?

    The markets seem to be able to shrug off all bad news and react very positively to even the most minor of good news. It is hard to hold the SPX 2000 +/- story at this point….

    1. It appears that way for now. Bear markets are difficult to trade and keep in mind, it just started a month ago.

      According to Cam’s analysis, the volatility may continue for another year.

      1. But in the mean time, many opportunities to “trade up” can (and have) been missed. What to do?

        1. I have a small long position in my investment account and a smaller short position in my trading account. If the market goes up I make a little. If the market goes down I can decide at what point I want to close my short and start buying more in my investment account.

          My greatest fear in holding these offsetting positions is that I will miss the opportunity to start moving my larger cash position into the market and it will leave the station without me.

        2. Adjust position sizing accordingly or hedge. You don’t necessarily have to use just SPXU to sell the market.

          Personally, I just sell shares of SPY for non leveraged plays and use futures to hedge my positions.

  7. Canaccord Genuity chief market strategist Tony Dwyer :

    Bear markets “typically have three phrases — you get panic, the relief rally and then you get frustration,” he told MarketWatch in a Monday interview. “We’re just entering the frustration part, which is the epic battle between monetary policy and economic damage.”

    1. So Old JePo is going to just make everyone whole again because it wasn’t their fault. Why don’t we just elect Bernie Sanders to the Presidency and let him shake the money tree and make us all prosperous. LOL

    1. Here goes the herd immunity out of the window if the dormant virus gets reactivated after a full recovery.

    1. It seems that earning are the only thing investors listen to from the bear side but they need to see them print before they take it seriously.

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