We are operating under the assumption we have begun a new Bull market and those who join will possibly double or triple their money in a short period if they are aggressive and can follow our market timing signals. This is why we are so BULLISH!
The Advance/Decline Indicator is one of two ingredients that, when combined, have had an outstanding record in calling the bull market. When the number of stocks advancing leads the number of stocks declining by a 2 to 1 ratio over a 10 day period, it is a rare and very bullish event. Just three months after such instances in the past, the Zweig Unweighted Price Index rose an additional 10.6%. The existence of a 2 to 1 advance/decline figure (for ten days) is the first condition necessary to herald a major bull advance. Let's call this factor a Super Advance/Decline Ratio.
The second condition involves the Fed Indicator. The Fed Indicator gains points when the Federal Reserve lowers either the discount rate or reserve requirements, and loses points when the Fed does the reverse. To verify the early stages of a powerful bull advance, the Fed Indicator must rise from a rating of zero points or less to a score of +3 points or more. (It requires a score of just +2 for the fed Indicator to rate "extremely bullish," but the requirement here is even more demanding.) If the Fed Indicator is +3 or higher, and then dips to scores of +2 or +1, and subsequently returns back to +3 or higher again, that would not produce the signal we are seeking. What we need is a move in the indicator from a negative or zero condition to a very, very positive condition. This usually requires at least two successive cuts in either the discount rate or reserve requirements. Let's call this condition a Super-Bullish Fed Indicator.
What we would like to find is a Super-Advance/Decline Ratio and a Super-Bullish Fed Indicator reading simultaneously. It is sufficient if the two occur within a relatively brief span of one another. Testing has found that a three-month time frame is reasonable. Now, let's put the two pieces-the Fed and the tape-together and hopefully load the shotgun. We'll call the pair a double-barreled buy signal.
Since 1932, there were only twelve such potent signs. The first double-barreled buy came on July 21, 1932, just two weeks after the Dow Industrials bottomed and about six weeks after the S&P 500 made its low. Without exception, all the double-barreled buys came early enough in the respective bull markets to catch a significant portion of the subsequent advances.
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Tom
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