Breadth Thrust Indicator 

The Breadth Thrust Indicator is a popular technical analysis tool that offers traders and investors a deeper understanding of stock market momentum. Created by renowned investor and financial analyst Martin Zweig, this indicator is designed to detect major market shifts and is particularly effective in identifying the beginning of bull markets. 

In this article, we will explore every aspect of the Breadth Thrust Indicator, including its concept, calculation, practical applications, and limitations, to thoroughly understand its workings. By the end, readers will gain valuable insights into this indicator, enabling them to use it effectively in trading and investment strategies. 

What is the Breadth Thrust Indicator? 

At its core, the Breadth Thrust Indicator is a momentum oscillator that measures market breadth, or the level of participation in market movements. It analyses the ratio of advancing stocks (stocks that have risen in price) to the total number of stocks in a given market. 

Key Features of the Breadth Thrust Indicator: 

• Momentum Measurement: Tracks the speed and intensity of market movements. 

• Breadth Analysis: Evaluates whether most stocks in the market are moving in the same direction. 

• Bull Market Signal: Identifies the early stages of significant upward market trends. 

The Breadth Thrust Indicator’s defining characteristic is its ability to identify a transition from an oversold market (characterised by widespread declines) to a robust uptrend (characterised by rapid gains across the board). 

Understanding the Breadth Thrust Indicator 

Historical Background 

The indicator was introduced by Martin Zweig, who observed that sudden, widespread increases in stock prices often preceded major bull markets. Zweig studied historical market data and discovered that such breadth thrusts were rare but highly reliable signals for impending upward trends. 

Zweig’s research revealed that between 1945 and 1985, only 14 instances of breadth-thrust signals existed. These events typically led to an average market gain of 24.6% within 11 months, establishing the Breadth Thrust Indicator as a crucial tool for long-term investors. 

Working of the Breadth Thrust Indicator 

The Breadth Thrust Indicator captures market momentum by analysing the proportion of advancing stocks relative to the total stocks traded. It works by calculating the percentage of stocks moving upwards (advancing) relative to the total number of stocks in the market over a 10-day rolling period. If this percentage surpasses the critical threshold of 61.5% within the 10-day timeframe, the indicator generates a bullish signal, suggesting a potential shift towards a bull market. 

The threshold of 61.5% is a pivotal marker. Historically, markets with a breadth ratio below 40% are considered oversold, reflecting widespread pessimism among investors. However, when the advancing stocks rise sharply and breach the 61.5% mark within a short period, it indicates a surge in positive momentum. This suggests that a significant portion of the market is moving in the same upward direction, often signifying the early stages of a broad-based uptrend. 

Example of Market Behaviour 

Consider a hypothetical scenario: 

• Day 1: The market is oversold, with only 35% of stocks advancing, while the majority are either declining or stagnant. 

• Day 10: Within the 10 days, there is a noticeable shift in sentiment. By Day 10, the percentage of advancing stocks rises sharply to 63%, surpassing the critical threshold of 61.5%. 

This rapid transition indicates growing market participation in the uptrend, signalling a potential bull market. Such a change demonstrates that the market is moving from a bearish phase, dominated by declining stocks, to a bullish phase, where optimism and buying momentum are gaining strength. 

Formula and Calculation of Breadth Thrust Indicator 

The Breadth Thrust Indicator uses a simple formula to measure market breadth: 

Breadth Thrust =  Advancing Stocks/Total Stocks (Advancing + Declining) 

Step-by-Step Calculation: 

1. Identify Advancing Stocks: Count the number of stocks whose prices have risen during a trading session.
2. Identify Declining Stocks: Count the number of stocks with falling prices.
3. Calculate Total Stocks: Add the number of advancing and declining stocks.
4. Calculate Ratio: Divide the number of advancing stocks by the total number of stocks.
5. 10-Day Moving Average: Compute the 10-day moving average of the daily breadth ratio.

The Breadth Thrust Indicator generates a bullish signal if the 10-day moving average exceeds 61.5%. 

Examples of Breadth Thrust Indicator 

Example 1: U.S. Stock Market, January 2023 

In early 2023, the U.S. stock market faced uncertainty due to fears of a recession and rising interest rates. Despite the initial bearish sentiment, the Breadth Thrust Indicator provided an early signal of a market recovery. 

• Initial Condition: At the start of January, the breadth ratio was below 40%, reflecting an oversold market with widespread stock price declines. Investors were largely pessimistic due to mixed economic data. 

• Signal: Over 10 trading days, the proportion of advancing stocks rose sharply, surpassing the 61.5% threshold. Better-than-expected corporate earnings and easing inflation data drove this increase. 

• Outcome: Following the signal, the S&P 500 index rallied by over 6% within the next month, marking the beginning of a broader market uptrend. The rally was characterised by strong participation across multiple sectors, including technology and consumer discretionary stocks. 

This example highlights the indicator’s ability to identify market reversals despite macroeconomic challenges. 

Example 2: Singapore Stock Market, June 2023 

In mid-2023, the Singapore Exchange (SGX) experienced a notable recovery following a challenging start to the year. Global inflation concerns and a slowdown in trade had weighed heavily on market sentiment. 

• Initial Condition: By early June, the SGX’s breadth ratio had dropped below 40%, indicating a heavily oversold market. Declining trade volumes and weak real estate and finance performance contributed to the bearish outlook. 

• Signal: Over 10 days in mid-June, the Breadth Thrust Indicator showed a rapid rise in advancing stocks, crossing the critical 61.5% mark. The turnaround was supported by stronger-than-expected GDP growth data and government initiatives to attract foreign investment. 

• Outcome: After the bullish signal, the Straits Times Index (STI) climbed by nearly 15% over the following two months, driven by gains in blue-chip stocks and renewed investor confidence. 

This example demonstrates the indicator’s effectiveness in capturing broad-based market recoveries, even in smaller yet globally significant markets like Singapore. 

Both instances underscore the Breadth Thrust Indicator’s utility as a reliable tool for identifying the early stages of bull markets, making it invaluable for traders and investors globally. 

Frequently Asked Questions