This past weekend, Chris Ciovacco, owner of Ciovacco Capital, gave us his take on the strength we are seeing in the broad market. Looking at market breadth, and specifically the number of stocks trading above their respective 200-day moving average, have we seen “the mother of all breadth thrusts”? Chris seems to think so.
First off, let’s look at the official definition of a Breadth Thrust, a momentum indicator developed by Dr. Martin Zweig: “A Breadth Thrust occurs when, during a 10-day period, the Breadth Thrust indicator rises from below 40% to above 61.5%. A “Thrust” indicates that the stock market has rapidly changed from an oversold condition to one of strength, but has not yet become overbought.”
Chris has taken more of an “extreme” approach to this definition, looking at periods where the indicator was below 10% and eventually rose to above 70%.
In 105 calendar days since the December 2018, we went from having less than 10% of stocks in the S&P 500 trading above their 200-day moving average to over 70% of stocks trading above as of late last week, or April 8th to be exact. This is a “very rare move”, according to Chris. The question is, has this happened before, and if so, what came next for the broad market?
Indeed, it has. In the last fifteen years, it has actually occurred twice: 2008/2009 and 2011. To take this one step further, as Chris notes, it did not happen during the flash crash in 2010 and it did not happen during the selloffs of 2015 and 2016.
Looking at 2009 specifically, Chris points out that we crossed above the 70% mark on July 1st of that year. From the bottom of this indicator on March 8th, a point in which less than 1.50% of stocks in the S&P 500 were above their 200-day moving average, it was a total of 114 calendar days until we saw a number of +70%. Over the next five-plus years, we saw the S&P 500 climb an impressive 130%. In regards to 2011, this breadth indicator reached its lowest point on August 6th. By January 25th of the following year, or 172 calendar days, the number of stocks trading above their 200-day moving average was once again back above 70%. From this point, until the market top in January of 2018, the S&P returned 117%.
Chris says that the current situation, as well as the previous two instances, are “radical and rapid shifts in the net aggregate opinion of all market participants.” On top of this, he says that the look of this chart “reflects every single fundamental and technical issue that you can think of on every single timeframe. It is the markets interpretation of all inputs and all fundamentals on all timeframes that causes this shift.” More importantly, according to Chris, “There is not one fundamental issue in 2019 that you can think of that’s not baked into this chart”.
Chris also mentions that this is the “fastest” shift in sentiment that we have seen, compared to the two previously mentioned environments.In fact, when looking at every 10% interval, the current “thrust” has been reached in a shorter timeframe:So, what should we expect for returns, looking at various forward-looking periods. Below is a chart of the returns seen in the previous two environments:
Chris notes that given these numbers, investors should keep an “open mind to the possibility of much better than expected outcomes in the days, weeks, months, and years ahead”.
While we don’t know what is yet in store for the market over the long-term and won’t know until the time has passed, given that the two instances of previous “thrusts” (2009 and 2011) showed very impressive forward returns, we may want to be leaning towards similar returns from this point forward. We just completed one of the best quarters of performance in the last decade. But also keep in mind that it came following one of, if not the worst, quarter in the last 30 years.
Only time will tell if this is simply the beginning of a new bull market. Come back in 2024 and we will let you know how it turned out!