If you’re bullish (long term positive signals edition)…

In yesterday’s column, Mark Hulbert indicated that the market has given a long-term buy signal with it’s strong rally off the bottom in June…

The particular formation is referred to as a "Nine To One Up Day." It refers to the volume of all NYSE-listed stocks that go up on a given day, expressed as a percentage of the total volume of all stocks that rose or fell on that day. On a day when rising stocks’ volume is the same as declining stocks’ volume, for example, this ratio would be exactly 50%.

A "Nine To One Up Day" occurs when this ratio is 90% or higher. According to Martin Zweig, who helped to develop this indicator several decades ago, such a huge imbalance of up volume over down volume "is a significant sign of positive momentum. In other words, when daily up volume leads down volume by a ratio of 9-to-1 or more, that tends to be an important signal for stocks." The quotation comes from Zweig’s 1986 book, "Winning on Wall Street."

Zweig used to edit two investment newsletters, the Zweig Forecast and the Zweig Performance Ratings Report, both of which were discontinued in the mid-1990s. Both were ahead of the stock market at the point they were discontinued. Zweig continued to manage a group of open-end and closed-end mutual funds and individual accounts with collectively more than $10 billion in assets; he announced his retirement in 2005.

How bullish are 9-to-1 up days? Zweig in his book argues that, "Every bull market in history, and many good intermediate advances, have been launched with a buying stamped that included one or more 9-to-1 up days."

The relevance of all this to today’s market is that there two 9-to-1 up days in June, one on June 15 and the second one June 29.

This second 9-to-1 up day adds greatly to the bullish significance of the first. That’s because a single 9-to-1 up day, by itself, has not always been a bullish event. Perhaps its biggest false signal came on March 16, 2000, at more or less the exact top of the market before the Internet bubble burst.

Such a spectacular failure might incline you to dismiss altogether any focus on the ratio of upside to downside volume, but that might be too hasty. In his 1986 book, Zweig acknowledged that a single 9-to-1 up day can issue false signals and that, therefore, it would be better to focus on occasions in which two such days occur relatively close to each other (Zweig used a three-month window,) and when also there is no day between these two days of big up volume in which in which there is a 9-to-1 down day (a day in which down volume is 90% of the combined volume of rising and falling issues).
Zweig called these "double 9-to-1 signals."

He reported that they are relatively rare, occurring once every two to three years, on average, since 1960, and particularly bullish. According to Zweig; over the six months and 12 months following each double 9-to-1 day between 1960 and 1985, the stock market was higher, sometimes significantly so.

Hulbert goes on to point out that Ned Davis has studied these market signals and found similar conclusions.  The following chart shows the 9 to 1 up days marked by an arrow.

Source: Ned Davis Research

While this 9 to 1 buy signal is definitely bullish, I should point out that the Zweig model, as described in his "Winning on Wall Street" book is currently negative.  The rising prime interest rate, the restrictive policy of the Fed, rising gold prices, the 5% decline in the Value Line Index and low levels of mutual fund cash reserves are all negatives in Zweig’s view.   At best, Zweig’s view of the market would be neutral although it seems that the "SuperModel" would most likely be negative, currently.