Market Insights: A Rare and Bullish Signal Triggered

Macroeconomic and Market Developments: 

• North American markets were up this week. In Canada, the S&P/TSX Composite Index rose 2.14%. In the U.S., the Dow Jones Industrial Average advanced 2.48% and the S&P 500 Index was up 4.59%.  
• The Canadian dollar looks stable, closing at 72.15 cents vs 72.22 cents last week. 
• Oil prices slipped this week. U.S. West Texas crude closed at US$63.23 vs US$64.29 USD last week. 
• The price of gold fell, closing at US$3,317 vs US$3,335 last week. 
• The Canadian federal election concludes on Monday. Tallying up campaign promises, the Liberal Party plans to introduce $129 billion of new spending and $52 billion of revenue and savings in the next four years, adding $219 billion to the federal debt. Meanwhile, the Conservative Party intends to raise $24 billion in revenue with savings of $29 billion, adding $89 billion total to the national debt over a four-year term. 
• The market climbed on Tuesday, with investors growing more optimistic about the White House’s progress in key trade deals with China, Japan, and India. Again, on Wednesday, the market got a further boost as President Trump walked back statements that he wanted to fire Fed Chairman Jerome Powell. 
• Apple (AAPL) and Meta Platforms (META) were hit by European Union fines totaling €700 million (€500 million against Apple and €200 million against Meta) for violating tough new antitrust rules for Big Tech under its Digital Markets Act. 
• Canadian mining company Teck Resources (TECK.b) reported higher commodity prices and copper sales volumes boosted its first-quarter profit. The company reported better than expected earnings of $0.60/share vs $0.36/share expected on revenue of $2.29 billion vs $2.15 billion expected. 

 

Weekly Diversion: 

Check out this video: You Can Do This on a Cruise Ship? 

Charts of the Week: 

The rare Zweig Breadth Thrust (ZBT), a bullish momentum indicator originally created by Martin Zweig, was triggered yesterday. This signal is notable for its impeccable historical track record: since World War II, it has occurred only 19 times, and each instance has been followed by higher S&P 500 Index levels six and twelve months later, making it 19 for 19. As we can see in the table, the average 6- and 12-month returns after this trigger were 14.8% and 23.4%, far outpacing the all year’s average since 1950 of 4.5% and 9.2%, respectively.  

The ZBT is triggered when the 10-day exponential moving average of the ratio of advancing stocks to total stocks on the NYSE jumps from below 40% to above 61.5% within a short time frame of ten trading days, indicating a rapid and broad-based shift from bearish to bullish sentiment. Historically, this rare signal has marked the early stages of significant market rallies, and while no indicator is infallible, nor does it mean we won’t get a lower low, the ZBT’s perfect record thus far makes it a closely watched event among many market participants. 

Source: Carson Investment Research, @Ryan Detrick 

For further optimism this week, we saw a three-peat of 1.5%+ daily gains in the S&P 500. The significance of the S&P 500 achieving three consecutive days of 1.5%+ gains is notable because it is a rare event in market history. Since the introduction of the five-day trading week in late 1952, this pattern has only occurred nine other times, as shown in the next chart by the red dots. A closer look at these instances reveals that such streaks typically happen as the market is rebounding after significant declines and prior to long-term uptrends, highlighting their association with periods of recovery.  

Source: Bespoke Investment Group 

Analyzing the actual numbers behind these streaks reveals that forward returns have generally been positive. Over the following month, the S&P 500’s median gain was 2.7%, with positive returns occurring about two-thirds of the time. After three months, the median gain more than doubled to 6.25%, with gains recorded in over three-quarters of the cases. The performance continued to strengthen over longer periods, with the one-year median return exceeding 22% and positive results in all nine instances studied. While current market conditions are certainly volatile, history suggests that when the market rebounds from declines with three consecutive days of 1.5%+ gains, it typically signals the start of a sustainable rally even the market hasn’t quite reached its ultimate low. 

Source: Bespoke Investment Group

Taking these two signals together, both happening the same day, and both with remarkable track records, increases the likelihood of their positive record continuing. 

Sources: Advisor.ca, Richardson Wealth, Canaccord Genuity, Bespoke Investment Group, yahoo finance, Carson Investment Research

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