A new breadth thrust buy signal?

Mid-week market update: Bulls were disappointed when the Zweig Breadth Thrust buy signal didn’t achieve its objective when the ZBT Indicator failed to rise from oversold to overbought in 10 trading days. But they received a consolation when it reached a late overbought reading on Monday, which was two days late.



Do the two extra days matter? Is this a sort or, kind of, breadth thrust buy signal?



An alternative breadth thrust

Jason Goepfert studied the history of ZBT buy signals within a 13-day window instead of the usual 10-day window, and the results were reasonably good.



Rob Hanna at Quantifiable Edges pointed that we saw a Triple 70 Breadth Thrust, defined as three consecutive days of NYSE up issues of 70% or more.



This is starting to look like an alternative breadth thrust buy signal. The good news with breadth thrust buy signals is the market tends to consolidate or pull back for about three or four days after the initial signal, which would have been on Monday. Is this an opportunity to buy?



Key risks

Before you go all-in on the long side, here are some risks to consider.


Yesterday’s release of the Senior Loan Officers Opinion Survey on bank practices (SLOOS) presented investors with some sobering news. After significantly loosening lending standards, banks marginally tightened them.



Tatiana Darie at Bloomberg observed, “A simple regression analysis based on SLOOS and high-yield bond defaults tracked by Moody’s suggests spreads should be widening based on these weakening fundamentals.”



This matters because the relative performance of junk bonds is correlated to equity prices because junk bond performance is an indicator of risk appetite. Right now, junk bond relative performance (green line) is exhibiting a minor positive divergence against the S&P 500. The risk is the spread widens and junk bond relative performance tanks and sparks a risk-off stampede.



In addition, cross-asset analysis shows that the bond market and the USD are driving stock market performance. Bond prices rallied out of their narrow range, but pulled  back in the wake of a weak 10-year Treasury auction today. The USD fell out of its range, but strengthened recently back into the narrow trading range. I interpret this as a non-confirmation of the breadth thrust signal and these cross-asset relationships need to be watched carefully.



In conclusion, the breadth thrust signals are constructive but need to be treated with some caution. Cross-asset analysis reveals a number of risks that could threaten risk appetite. If you want to trade the breadth thrust signal, trade it with a trailing stop loss discipline.


My inner investor remains bullishly positioned. My inner trader took profits in his S&P 500 long position on Monday and he is staying on the sidelines for now.