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This Indicator Screamed 'Buy.' Does It Now? By Spencer Jakab

It looks like U.S. stocks will give back a small part of yesterday's monster gains when trading begins. Economists will watch the report on U.S. consumer inflation for some early signs of tariff impacts.

***

Things looked bleak a few weeks ago, but it was a great time to buy stocks.

Traders following a rare technical signal didn't need convincing. They posted complicated-looking charts touting the undefeated record of a measure called the Zweig Breadth Thrust Indicator . Named for market timer and newsletter writer Martin Zweig , whose greatest claim to fame was predicting the 1987 stock market crash, it sounds odd and a bit lewd.

In a nutshell, the Zweig indicator flashes on those rare occasions when the ratio of advancing to declining stocks on the New York Stock Exchange rapidly flips from low to high. Such a stark sentiment shift is considered a "bear killer" writes Doug Ramsey, chief investment officer at Leuthold Group. Since 1950 stocks have never advanced to a cyclical bear market after one was spotted.

Like many technical signals, it tells you in part what's already happening-it was triggered in the middle of a nine-day winning streak for the S&P 500. To remain undefeated, though, stocks will have to be higher in both six and 12 months. Going back to 1950, the S&P 500's average gain has been 16.2% and 23%, respectively, over those periods when the indicator was triggered, writes Ramsey.

That's noteworthy: The odds are about one-third of a percent for stocks rising in 16 random six-month periods. But is it a valid reason to buy stocks today?

Other technical indicators like the ominous-sounding Hindenburg Omen have sparked scary headlines in recent years and fallen flat. Fisher Investments points out that a bearish "Death Cross" was sparked at the perfect time to buy in the Covid bear market and a bullish "Golden Cross" buying signal four months into that huge rally.

Fred Schwed Jr., who eviscerated Wall Street brokers in his book " Where Are the Customers' Yachts , " cautioned against following a chartist's advice.

...all he sees for certain is a history of past performances clearly and conveniently depicted. That one can, by examining the line drawn already, make a useful guess on the line not yet drawn, must be predicated on the hypothesis that "history repeats itself." History does in a vague way repeat itself, but it does it slowly and ponderously, and with an infinite number of surprising variations

It's those variations that should make one think twice about buying solely because the Zweig indicator has worked. The three largest 12-month gains came at the very end of major bear markets in 1975, 1982 and 2009. Three other instances were repeats, coming within 12 months of the previous signal. One came at a particularly fraught moment during the start of the Korean War and another after the Cuban Missile Crisis.

The trade war was scary in its own way, with investors selling stocks broadly and then diving back in. Deep pessimism is hard to sustain and technical analysis is good at identifying psychological turning points...in hindsight.

With stocks actually higher than they were on Liberation Day, up 17% from their April low, and many tariffs still in place, it might not be very good at predicting the next six or 12 months. That line hasn't been drawn yet.

Stocks I'm Watching

Coinbase : Shares rallied 10% premarket after S&P Dow Jones Indices said the crypto exchange will join the S&P 500 on May 19.

Boeing : The aviation company's shares edged higher premarket after Bloomberg reported China scrapped a ban on airlines taking delivery of Boeing planes.

Hertz : The rental-car company posted a steeper-than-expected quarterly loss and warned of cooling demand from businesses and international travelers. Shares fell about 7% before the bell.

Bayer : The German company's latest quarterly results topped Wall Street's expectation , driven by cost-cutting and demand for kidney and cancer drugs. Shares climbed 10% in Frankfurt.

Honda : The Japanese automaker projected U.S. tariffs will wipe about $3 billion off its annual profit, but shares edged higher in Tokyo alongside a broader rally in Japanese stocks.

Alibaba , PDD Holdings , JD.com : U.S.-listed Chinese stocks came under pressure early Tuesday as the rally sparked by the U.S. and China's agreement to slash tariffs fizzled.

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About Me

My name is Spencer Jakab and I've been musing about money and markets for more than 30 years, including editing The Wall Street Journal's Heard on the Street column for a decade, writing two investing books and running a team of stock analysts at a global investment bank.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

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May 13, 2025 06:37 ET (10:37 GMT)

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