Trading the breadth thrust

Mid-week market update:  I discovered an error in my last publication (see A Momentum Renaissance). The market did not achieve a Zweig Breadth Thrust buy signal last Thursday as I previously indicated, though it was very close.

As a reminder, the Zweig Breadth Thrust buy signal is triggered when the ZBT Indicator moves from an oversold to overbought reading within 10 trading days. In my previous publication, I misinterpreted the first day of the window as September 25, it was actually September 24. The ZBT reached an overbought condition in 11 days, not 10, therefore the ZBT buy signal was not triggered.


I apologize for the error. Nevertheless, several other breadth thrust signals with less strict criteria were recently triggered, and it is worthwhile analyzing how to trade such conditions.


The Whaley Breadth Thrust

While the ZBT buy signal just missed its mark last Thursday, Steve Deppe pointed out that the market flashed a Whaley 2:1 Breadth Thrust (WBT) that day. The history of past WBT buy signals is impressive. In the table provided by Deppe below, I have marked the instances where WBT buy signals coincided with the stricter ZBT buy signal since 1990.


I further analyzed the history of WBT buy signals that exclude the stricter and more powerful ZBT buy signal, and further excluded signal overlaps in two months. There were 18 such buy signals since 1990, and the results are less impressive than first glance. While this class of signals was a better indication that the S&P 500 would rise in the next month, the median return roughly matched the benchmark. Returns over a 3, 6, and 12-month horizons were better, median return alpha peaks and begins to fall off after three months.



Frothy sentiment

Another disconcerting sign of the latest buy signal is the excessive bullish sentiment, as measured by the 50 day moving average (dma) of the CBOE put/call ratio (CPC). Since the market bottom of 2009, CPC has stayed elevated, and it is unusual to see a WBT buy signal triggered when CPC is so low, indicating excessive bullish sentiment. The last time this happened in early 2014, the market traded sideways.


The low put/call ratio is attributable to high speculative activity in individual stock options. Single stock option volumes are spiking again, and there are rumors of another “whale” buying large-cap growth stock call options in the market. Bloomberg reported that a single buyer appeared on Monday, and bought $200 million of single-stock call options.


There are other signs that sentiment is becoming frothy. Callum Thomas conducts a weekly unscientific Twitter poll, and the latest readings are at the top end of the historical range.


Data from Goldman Sachs Prime Brokerage shows that Equity Fundamental L/S hedge fund leverage already at or near historical highs. These funds are positioned for a Q4 melt-up.



Breadth Thrust, Meets frothy sentiment

How should investors and traders approach this combination of breadth thrust, which tends to be bullish, and excessively bullish sentiment, which is contrarian bearish?

The answer depends on your time horizon. Tactically, the bullish stampede has seen traders pile into call options, which forced market makers to hedge by buying stock and pushing the market upward. Andrew Thrasher observed that dealer gamma, as measured by GEX, is at an off-the-charts high reading. However, GEX tends to peak out before the market peaks.


This week is option expiry week, and many stock options will expire this Friday. Dealer exposure will change significantly, and gamma is likely to fall dramatically after the close Friday.

Short-term traders can try to get long and buy here for a scalp into a possible market ramp into Friday’s expiry. After that, all bets are off. Today’s market action was constructive. The S&P 500 retreated and filled the opening gap from Monday, but the NASDAQ 100 did not, indicating that large-cap growth leadership remains intact.


This is a volatile environment, and positions should be scaled accordingly to the expected level of volatility. Otherwise, my intermediate-term outlook remains unchanged. The Asset Allocation Trend Model remains at a neutral reading. The prudent course of action is to stand aside and wait for the volatility to sort itself out.

24 thoughts on “Trading the breadth thrust

  1. Cam: ‘ I misinterpreted the first day of the window as October 25, it was actually October 24. The ZBT reached an overbought condition in 11 days, not 10, therefore the ZBT buy signal was not triggered.’
    That should be September 24 to October 8 and technically that is 10 daily bars (counting bar close to bar close) where $SPX gained 7.86% and ZBT went from 0.4017 to 0.6447 using Tradestation data ($SPX, $ADV, $DECL). Semantics aside on how one could count the periods, that should be considered as a Zweig Breadth Thrust. It is like counting hour close from 1 o’clock to 6 o’clock, you should get 5 hours and not 6.

    1. Thank you for pointing out the typo. I had a senior moment, and the text has been corrected.

      1. I meant this for Alex. If I remember correctly, the divisor must also include the unchanged stocks, in which case the miss was larger. The peak was 0.5729 according to eSignal.

  2. Opening in the hole.

    Trimming positions yesterday helps, but still long SPY/ DIA/ AAPL/ EEM/ FXI/ XLF/ BAC/ C.

    I need to decide when/where to cut losses. Unlike three weeks ago, I’m not looking to buy in the hole.

    Currently ~40% invested. Up ~0.5% yesterday overall, and looking at a -0.4% opening hit today. Not the worst position to be in, but obviously not what I had in mind. If my exposure was closer to say 17%, then I’d probably take a chance on adding to existing positions. Instead, I’m leaning towards capital preservation.

    Unlike three weeks ago, I’m not looking to

  3. The vast majority of my gains yesterday were due to small percentage positions in NIO/ NET/ BIDU. Even a 4-5% position pays off well when the stock price jumps 5-10-15-20%.

    My main concern right now is whether the opening lows hold and reverse, or whether it signals the start of a deeper decline.

    Interestingly, whereas I always struggle with missing out on further gains – I have no problem at all taking losses quickly. It may be my greatest edge when trading.

    1. Bona fides of a good trader – the ability to take losses quickly without second guessing. Congratulations!!!

      1. If/when it heads higher – which it will – I can consider buying higher. Alternatively, if it continues to sell off hard – I can buy back lower. That’s just the way the game is played.

  4. SPY off here. I don’t have a crystal ball, so given my position size the only real option is to admit I’m wrong and get out.

  5. Wrong call closing banks/SPY this morning. On the other hand, neither EEM nor AAPL have made much headway.

    Early morning hits will be mitigated/offset (hopefully) by flat to higher closes for RYDHX (the Rydex version of DIA) + RYKAX (Rydex Banking Fund).

    1. Sometimes the end-of-day only trading restriction works in my favor, forcing me to exercise more patience.

      The only reason I did NOT close the Rydex versions of DIA/XLF earlier was the absence of an option to trade the funds at the 730 am trading window (whereas I was able to close the Rydex version of SPY).

      My error this time around was position sizing. I was betting on a rebound in financials to lead the indexes higher.

      1. Gun to head, today’s intraday reversal was a snapback (and thus a selling opp).

        I think we’re headed lower.

        The portfolio will end the day lower by -0.37%, and probably dodged a bullet. (The portfolio is also now exactly -0.37% off its all-time high.)

        1. In the event, RYDHX closed down just -0.08%, and RYKAX closed UP +1.7%.

          Sure, I’m well aware that consistent returns require knowledge and skill – but I also respect the enormous role that pure luck has played over the years.

    1. SentimenTrader made a good point this morning – a contrarian approach won’t always be the right move.

  6. Scaling back into NIO/ NET/ BIDU/ XLE/ QQQ/ AAPL/ XLF.

    Will reopen Rydex versions of SPY/ QQQ at the close – sizing down this time.

    1. Or maybe I’m misinterpreting the table – in which case next week will rank among the worst 😉

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