An Indication Of Waning Momentum

I have likely mentioned a time or two that I believe I have earned, at the very least, an honorary degree from Wall Street’s school of hard knocks over the last 30 years. You see, I didn’t have a mentor to teach me the stock market game. No, I simply tried to learn as much as I could, as fast as I could, and attempted to stay on Ms. Market’s good side as often as possible along the way. To be sure, it’s been an exciting and, for the most part, enjoyable ride.

It is for this reason that I derive a fair amount of pleasure from writing about some of the lessons I’ve learned. It is my sincere hope that I can pass along a nugget of wisdom every now and again about how the game is played. And I especially enjoy pointing out investing strategies/concepts that seem to work over long periods of time. Or on the other side of the coin, stuff that simply doesn’t work at all anymore.

On the subject of the former is something called a “breadth thrust.” I’m not sure who actually invented the concept, but I learned about it from Ned Davis and the late Marty Zweig. According to Mr. Davis, who possesses an enviable long-term record as a risk manager, “When truly long-lasting advances get started, they usually do so with a burst of strength much like a space rocket does when it leaves the launching pad.” Hence the use of the term “thrust” in the name of the indicator.

There are many variations of these “breadth thrust” indicators including price, volume, and advances vs. declines. The idea is simple. When stocks run higher in a meaningful fashion, the move tends to be accompanied by a thrust in market breadth. And history shows that such “breadth thrusts” have been wonderful predictors of above average returns over the ensuing week, month, quarter, and year.

The 10-Day A/D Thrust Indicator

As I mentioned, I follow several such “thrust” indicators, but one of the best involves a surge in advancing versus declining issues. One such indicator involves the ratio of 10-day advances to 10-day declines. When this ratio exceeds 1.9 – indicating that advancing issues have swamped declining issues over a two-week period – a buy signal occurs.