A rare sign of strong momentum occurred over the past two weeks
CHAPEL HILL, N.C. (MarketWatch) — The stock market over the past two weeks has done something that’s occurred only 13 other times since 1949.
And following those past instances, the stock market proceeded to perform very well.
That’s according to Dan Sullivan, editor of The Chartist advisory service. Sullivan has one of the longest tenures as an investment newsletter editor of anyone still publishing today, having inaugurated his service in 1969 — 47 years ago. The Chartist is also one of the top-ranked newsletters for performance dating to 1980, which is when the Hulbert Financial Digest began monitoring the industry.
This is the feat that the stock market recently accomplished: Over the 10 trading sessions through July 12, the average number of advancing stocks on the New York Stock Exchange (NYSE) exceeded the average number of declining stocks by a ratio of more than two to one. Sullivan is not the only technical analyst who focuses on the advance-decline ratio, and there are many different ways to construct market-timing indicators from the raw data.
But the general idea behind Sullivan’s indicator and others like it is that “strong momentum tends to persist,” as the late Martin Zweig put it in his 1986 classic, “Winning on Wall Street.” Zweig used to edit several top-performing investment newsletters in the 1970s and 1980s; he later became the manager of a number of mutual funds. He added: “It is a sign of very strong momentum when advances overwhelm declines for a significant span.”
Sullivan says he doesn’t know if he was “the originator of the two-to-one rule, but we have been using the A/D Ratio as a measurement of thrust since the early 1970s.”
The chart above is based on data calculated by Sullivan, showing the Dow Jones Industrial Average’s DJIA, -0.09% following the 13 prior instances since 1949 in which the 10-day A/D ratio exceeded two-to-one. On average, as you can see, the Dow was 7% higher within three months, 15% higher in six months, and 20% higher in one year.
Sullivan also reports a remarkable consistency in the market’s positive reaction to prior 10-day A/D ratios above two-to-one. Over only one of the 13 three-month periods did the Dow decline, for example, and that lone loss was small — just 0.42%. At the six-month horizon, the Dow was higher in all 13 instances.
In acknowledging that this track record is “most impressive,” Sullivan added the appropriate qualification: “What has happened in the past does not necessarily translate into the future. Putting it another way, there is no such thing as a perfect indicator.”
Nevertheless, he said: “The only thing we have to go on is what has happened in the past.” And, for now at least, Sullivan is bullish on the stock market and recommending a 100% invested position.
Readers are invited to review the Hulbert Sentiment Indices or email the author.