Should We Trust The Thrust (Again)?

As a rules-guided money manager, I scan hundreds of indicators each week. I look at market fundamentals such as monetary conditions, earnings, economic data, and inflation expectations. In addition, I look at a myriad of technical indicators as well as "external" indicators such as investor sentiment and valuations. I combine indicators and models to provide various signals and trading systems. In short, my thinking is that if I can stay in tune with the weight of the evidence from a vast array of indicators, market drivers, and models, I am less likely to get an important move in the market wrong. More importantly, such an approach is designed to remove as much emotion from the analysis as possible from the decision-making process.

One of the most important lessons I've learned over the past 34 years is that times change. Market drivers change. Rules change. Securities change. Costs change. And indicator effectiveness can change. It is for this reason that I constantly monitor whether important indicators are "working" as expected.

An example of an indicator's effectiveness failing would be the put-call ratio. Invented by the late Marty Zweig in the mid-1980's the P/C Ratio was a wonderful stock market indicator. At that time, hedging with options wasn't a "thing" and as such, looking at the percentage of puts being bought versus the percentage of calls provided an important message. However, as I mentioned above, times change. In this case, the advent of computers allowed significant advancements in the investing world and the use of options - for many and varied reasons - exploded over the years. The end result was the death of the P/C Ratio as an important stock market indicator.

However, I am happy to report that many stock market indicators remain tried and true in their ability help us stay on the right side of the market's prevailing cycle. One such group of indicators has been dubbed "breadth thrusts" by the renowned Ned Davis of Ned Davis Research Group.

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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should ...

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