Zweig Breadth Indicator

This is an indicator that was developed by Dr. Martin Zweig. The Breadth Thrust Indicator measures market momentum. I will not go in to how the indicator is calculated but suffice it to say that the "Breadth Thrust" occurs when during a 10-day period the indicator rises from below 40% to above 61.5%. This indicates that the market has rapidly changed from an oversold condition to one of strength but is not yet overbought.

According to Dr. Zweig there have only been 14 of these thrusts since 1945. Each time the thrust occurred the market rallied significantly and the average gain in the market was 24.6% over the next eleven months. In fact most of the best bull markets start with a Breadth Thrust.

I always check this indicator and as of Friday the indicator closed at 61.3% in only eight days. This is within a whisker of fulfilling the indicator requirement which may be achieved on Tuesday. Should this occur it appears that the market will enter a year long bullish phase with significant upside.

This certainly goes against what I expect so I will be monitoring the indicator very closely but it does appear that there is a fundamental shift happening in the market. The bond market appears to be rolling over which could lead to additional gains being made on the long side for the foreseeable future. Furthermore there is a chance that the market rallies for the next year based on more quantitative easing from the Federal Reserve. This could place a temporary support under the housing market and risk aversion could reignite the market to rally.

While it is still my contention that all of this will still be a short term fix to a long term structural problem, if you are trading and are expecting a market collapse (as I am) this indicator could be pointing the way and it is in the opposite direction. Do not get too wedded to your opinions as if the market does rally 25% from here there will be a lot of pain to be felt if you are short.