I write a daily email, The Daily Chart Report, that covers the best technical analysis content being shared each day. One of my favorite parts of putting together this email is the Quote of the Day. Marty Zweig is one of my favorite people to quote. For those of you unfamiliar with his work, he had a successful career on Wall Street as a trader and investment advisor. He was influenced by the trend-following sub-culture and made some notable contributions to the study of Technical Analysis. I ended up falling down the Zweig rabbit hole trying to soak up as much information as I could on the guy, so I figured I’d share some of the things that I learned.
Whoever said: “I’ve never met a rich technician” clearly never crossed paths with Marty Zweig. According to Forbes, he lived an “eccentric and lavish lifestyle” and owned the keys to one of the most expensive pads in Manhattan.
1.) He Predicted the 1987 crash
On Friday, October 16th, 1987, Zweig made an appearance on the popular TV program, Wall Street Week with Louis Rukeyser. He spent his air time outlining his reasons for anticipating a crash in the stock market. He emphasized that he wasn’t predicting a prolonged bear market, but instead, a violent, short-lived crash.
The following Monday, October 19th, the stock market suffered its worst days in history known as Black Monday. The Dow Jones Industrial Average collapsed more than 22% in a single day! Zweig’s interview begins at about 6½ minutes into the clip below and has to be one of the most timely market calls in the history of financial media.
2.) The Put/Call Ratio
While working on his Ph.D. dissertation at Michigan State University, Zweig created the Put-Call Ratio – a now-popular short-term sentiment indicator that compares the volume of put options to call options. The ratio is used to gauge the level of fear and greed in the market. Like most sentiment indicators, it is best used as a contrarian indicator when the ratio is printing extreme readings. The options market was still in its infancy when Zweig introduced the Put-Call Ratio, but today, it is a commonly used tool that can be found on nearly every trading platform.
3.) Breadth Thrust Indicator
Zweig understood that technical concepts like sentiment, momentum, and breadth drove price action in the short-term. In addition to creating the Put-Call Ratio, Zweig developed the Breadth Thrust Indicator, a breadth/momentum indicator used to identify major shifts in the primary trend. It is calculated by dividing the number of advancing issues by the number of total issues and creating a 10-day exponential average of that figure. Between the years of 1945 and 2000, this indicator has flashed 14 buy signals with an average gain of 24% in the 11-months following the signals.
4.) “Don’t Fight the Tape”
This was one of Zweig’s cardinal rules. To me, it really reflects his trend-following mentality. In his book, Winning on Wall Street, Zweig emphasized the importance of trend following:
“Big money is made in the stock market by being on the right side of major moves, I don’t believe in swimming against the tide. — The idea is to get in harmony with the market. It’s suicidal to fight trends. They have a higher probability of continuing than not.”
5.) “Don’t Fight the Fed”
Zweig’s second cardinal rule couldn’t be more relevant right now. It echoes famous market aphorisms like; “the market can stay irrational longer than you can remain solvent.” Sure interest rates have a huge influence on the Stock Market and the Economy, but a lot of traders get burned trying to figure out how and when monetary policy will affect the stock market. We all know the perma-bears out there who have been calling for a recession due to a Fed-induced asset bubble. Without naming names, they’ve been wrong for years trying to fight the Fed.
He outlined his entire investment strategy in his book Winning on Wall Street. Zweig used Fundamentals as a jumping-off point to identify what to buy. From there, he would employ Technical Analysis to time his entries and exits. Like most profitable traders, he understood the importance of risk management, writing;
“According to my rulebook, the only consistent way to make money in the market is to cut losses and run with profits. You can be right on individual stocks as little as 30% of the time and still do well if you can get out when the getting is good.”
Unfortunately, Zweig passed away in 2013 but his wisdom continues to be as relevant as ever in today’s markets.