The Nasdaq triggers a rare breadth signal

Key points:

• Nasdaq advancing issues outpaced declining issues by a 3-to-1 ratio in three out of ten sessions
• Similar advance-decline ratio skews led to outstanding returns for the Nasdaq Composite
• When Nasdaq breadth leans bullish like now, S&P 500 returns and win rates are robust

A rare and bullish market breadth signal

Over the past few weeks, the research team has shared numerous breadth-based buy signals suggesting a new upswing in the cyclical advance after the 10% correction. When examining market breadth, I like to see a broad spectrum of indexes and exchanges generate alerts as the likelihood of encountering a whipsaw scenario decreases with widespread participation. 

With New York Stock Exchange data triggering a Zweig Breadth Thrust and over 25% of stocks closing with a daily gain of 4% or more, a signal from the Nasdaq Exchange would provide a compelling case for a continuation of the rally.

As luck would have it, the Nasdaq generated a bullish signal this week when advancing issues outpaced declining issues by a 3-to-1 ratio in three out of ten sessions. 

Similar advance-decline ratio conditions preceded excellent returns

Whenever Nasdaq Exchange advancing issues outpaced declining issues by a 3-to-1 ratio in three out of ten sessions, returns, win rates, and z-scores for the Nasdaq Composite are outstanding. Over the subsequent three months, the composite rallied 100% of the time. 

If I were to speculate on the prolonged gap between signals from 1982 to 2009, my hunch leans towards alterations in market structure as the main culprit.  

Over the subsequent two months, the max gain exceeded the max loss in 15 of 18 cases. Additionally, the Nasdaq Composite encountered only four precedents of losses surpassing 5% over that same period.

Bullish for the broad market

As one might expect, when advancing issues outnumber declining issues on the Nasdaq Exchange like now, the S&P 500 performs exceptionally well.

What the research tells us...

Advancing issues outpaced declining issues by a 3-to-1 ratio in three out of ten sessions on the Nasdaq Exchange. After similar signals, the Nasdaq Composite and the S&P 500 displayed excellent results across all time horizons. With markets rallying significantly over the last three weeks, a pause that refreshes a new upswing would not be surprising.