The major stock market indices basically did a lot of nothing last week. Sure, there was some tariff news to deal with, some big earnings reports, the usual spate of economic data, and even a Fed meeting. But in the end, the S&P finished within 1% of where it was the week prior.

Given the fact that stocks had put up a nine-day winning streak and recovered more than 60% of the recent decline, investors couldn't be blamed for taking a break from the buy button. After all, the market had become overbought from a short-term perspective and both the S&P 500 and the Nasdaq 100 had begun flirting with their respective 200-day moving averages.

Frankly I've never put too much emphasis on the 200-day. However, a great many managers as well as the popular financial press see the indicator as a line in the sand between bull and bear markets. While it is true that most of the market's gains occur when the market is above its 200-day, in this environment, such a line can become a form of resistance and/or a logical point for the bears to reload. We shall see.

The Big News

Although the action has been relatively subdued for a change, there was a big event under the surface to report on. You see, one of my favorite indicators flashed a buy signal last week. An indicator that has a very long history of signaling better days ahead. Some might even call it an "all clear" signal.

It's called a "Breadth Thrust." And the bottom line is that when these signals occur, the stock market tends to perform much better than average over the ensuing 2 weeks as well as the next 1-, 2-, 3-, 6-, and 12-month periods.

To review, market "breadth" is generally a measure of how many stocks are advancing versus declining, or the volume of stocks rising compared to those falling. Common breadth indicators include the ratio of advancing vs declining issues over different periods of time, up volume vs down volume, new highs vs new lows, and the percentage of stocks above their moving averages.

In simplistic terms (my favorite kind!) a "Breadth Thrust" occurs when buying overwhelms selling over a period of time - think a week or two.

Historical Research Shows...

One of my favorites is the ratio of cumulative advancing stocks versus declining stocks over a 10-day period. According to the computers at Ned Davis Research (NDR), when the cumulative ratio of advances versus declines over 10 days moves above 1.4%, good things tend to happen.

Since 1947 NDR tells us there have been 56 of these signals. Two weeks after the signal the S&P has been higher 64% of the time. And while the average return for the venerable blue-chip index is 0.35% for all two week periods, the mean return 10 days after the Cumulative 10-Day Advance/Decline signal has been 1.38%.

One month after the signal, the S&P has been higher 75% of the time with an average return of 2.44%, which is more than 3X the mean for all periods. Two months out, stocks have been higher 80% of the time with an average return of 4.05% vs 1.45% for all 2-month periods. Similar outperformance has occurred for three and four months after the signal. Six months out, the S&P was higher 86% of the time with returns of 10.10% vs. the average of 4.45. And finally, one year after the signal, the market has been higher 55 out of 56 occurrences, with an average gain of 16.85% versus 9.16%. Not too bad, right?

Trust The Thrust

So, when this particular indicator flashes a fresh "thrust" signal, I definitely tend to sit up and take notice.

However, when several thrust signals occur within a short period of time, history teaches us that this is a time to give the bulls the benefit of the doubt.

According to NDR, there are an even dozen breadth thrust indicators. And history shows that since 10/1/1980 (the date all the indicators are available), after 5 of the 12 Breadth Thrust buy signals have occurred, the S&P 500 has been higher one year later, wait for it... every... single... time. And the mean return for this "weight of evidence" thrust signal has been 21.52% after one year, which is more than double the average of 10.35% for all one-year periods since 10/1/1980.

Over the last 10 years, the results are also strong. Since 5/5/2015, 5 or more of the 12 signals have occurred 8 times. Stocks were higher two weeks later all 8 times. Two months later: 7 out of 8 times. Same for six months later. And one year later, the record was a perfect 8 for 8, with an average return of 25.9% versus 10.35%.

The good news is that both of the signals we've reviewed here gave buy signals on Monday, May 5, 2025. As such, history suggests that while markets never move in a straight line, there are reasons to believe that stocks should be higher in the coming months.

Could this be the first "miss" for the Breadth Thrust signals? Sure. Anything can happen in Ms. Market's game. And since we are in a news-driven environment, almost anything is possible for the foreseeable future.

But with consensus EPS still expected to grow by more than +11% this year (and another +14% next year) and the breadth thrust indicators on buy signals, there are reasons to shut out all the doom and gloom forecasts and look on the bright side.

Thought for the Day:

The more we allow expectations to drive us, the further we push our potential away. -Yehuda Berg

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research, a Registered Investment Advisor

Disclosures

At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.

NOT INDIVIDUAL INVESTMENT ADVICE. IMPORTANT FURTHER DISCLOSURES