U.S. stocks closed out a strong week on a positive note Friday - but it's the triggering of a rare, bullish technical indicator in the previous session that has investors excited.
Stocks went on a tear after President Donald Trump earlier this week said tariffs on China imports would soon fall from their present level at 145%, and after he said he wasn't considering an attempt to fire Federal Reserve Chair Jerome Powell.
What stock-market bulls particularly liked about the rally is that it was broad. A vast majority of stocks participated - enough that Thursday's session triggered what's known as the Zweig Breadth Thrust Indicator, which was popularized around four decades ago by the late Martin Zweig, a legendary investor and market timer.
Here's a description of it from Dean Christians, senior research analyst at SentimenTrader:
The indicator measures NYSE advancing issues as a percentage of advancing and declining issues, smoothed by a 10-day exponential moving average. An alert is triggered when the indicator cycles from below 40% to above 61.5% in 10 trading sessions or fewer.
As Christians explained in a Friday note, the emergence of thrust signals during a market downtrend often indicates the broader trend is starting to reverse. That doesn't guarantee a smooth transition, but history suggests stocks tend to be higher six to 12 months later, he said, while noting that short-term volatility is likely to persist, especially given continued uncertainty around tariffs.
Mark Newton, head of technical strategy at Fundstrat, noted the median return for the S&P 500 SPX after a Zweig thrust "tends to be quite positive following a period of abnormally high market breadth happening from extremely low levels." (See table below).
The record is impressive, particularly when looking at 12-month forward gains, which saw the S&P 500 rise in all 10 instances following a Zweig breadth thrust going back to 1982.
But technical analysts are quick to caution there is more to consider and that investors may be in for a bumpy ride, at least in the short term.
"While I suspect this helps to confirm that our April lows are in place, it's right to reiterate that weekly momentum remains negative. Furthermore, a lot of work is required to help with weekly momentum and the technical structure's improvement," Newton wrote. "At present, I view this as an intermediate-term bullish signal for U.S. stocks."
And Christians at SentimenTrader cautioned that not all Zweig signals are without risk. In particular, he highlighted the 2015-16 stock-market correction caused by a growth scare, an episode that could arguably serve as an analog to the current market setup.
A rally on par with 2015's 4.8% maximum gain following a Zweig signal would take the S&P 500 to its 200-day moving average around 5,747, he noted. The S&P 500 subsequently fell back, posting a maximum pullback of more than 9% (see chart below).
What might trigger a retest scenario similar to the one in 2015? "One likely cause would be the failure to secure trade agreements, or a material deterioration in hard economic data stemming from the initial tariff shock, prompting consumers and businesses to delay spending and investment decisions," Christians wrote.
The S&P 500, Dow Jones Industrial Average DJIA and Nasdaq Composite COMP stretched their winning streaks to four sessions on Friday, with all three posting solid weekly gains.
Technical analyst Tom McClellan, editor of the McClellan Market Report, said in a Friday update that he doubts Thursday's Zweig thrust will prove to be a "stellar example of this signal."
He believes the market strength that triggered the indicator is a "typical bear-market countertrend rally," which could fizzle fast. McClellan has been neutral for short- and intermediate-term trading cycles the past two days, after being bearish for the previous seven sessions.
For long-term trading styles, he has been bearish for a while. "We are still in a bear market, and it has more time yet to run," he said.