A rare buy signal from a TCTM composite thrust model component

Key points:

• On Tuesday, the NYSE up/down volume ratio exceeded 8/1 for the 2nd time in the last 3 sessions
• The surge in up volume relative to down volume triggered a new TCTM composite thrust model signal
• The S&P 500 rallied 88% of the time over the next 3, 6, & 12-month time frames after other signals

A short-duration volume indicator suggests panic buying

A new signal from a voting member in the TCTM Composite Thrust Model issued an alert at the close of trading on Tuesday. The component is called the 2/3 volume ratio thrust.

The algorithm identifies when the ratio between NYSE up and down volume exceeds 8/1 in 2 out of the last 3 sessions, with the pause coming in the middle. i.e., day 2. If the signal looks familiar, it's because Jason highlighted a similar volume-based surge in a note on Wednesday. 

Similar signals preceded gains 88% of the time

This model generated a signal 16 other times over the past 70 years. After the others, S&P 500 future returns, win rates, and z-scores were excellent across all time frames. The signal shows a gain at some point in the first three months in 14 out of 16 instances.

Let's zoom in and review some of the signals/charts since 1962. 

Current day chart example

2007-08 chart example

1973-74 chart example

1962 chart example

The 2/3 volume ratio signal has an excellent track record. However, I would note the rarity of signals when compared to other components in the TCTM composite thrust model. 

While a few short-duration components have triggered a signal in the current drawdown phase, we have not seen long-duration models like the percent above the 50-day or percent of issues at a 4-week high initiate an alert. One of the fundamental principles behind the composite thrust model is duration diversification. Using a broad range of input lengths for the indicators makes the model less likely to trigger a whipsaw signal.  

What the research tells us...

When the ratio between NYSE up and down volume exceeds 8/1 in 2 out of the last 3 sessions, the surge in up volume relative to down volume signals a sense of urgency on the part of buyers that typically leads to further positive momentum. Similar setups to what we're seeing now have preceded excellent returns, win rates, and z-scores across all time frames.