Momentum Indicators

Martin Zweig uses momentum indicators to time stock market entries and exits.
Martin Zweig's objective is to ensure his money is fully invested in the market at the right time - he wants his money to be exposed to major bull markets but not to be exposed to major bear markets.

Many years of data testing have led him to conclude that strength in the stock market leads, on average, to greater strength. Major investment of cash in the markets must, therefore, wait for the stock market to show strength.

Major bull markets emerge from a convergence of conditions. The economy is likely to be in recession, with interest rates falling. The market will be beaten down, with the average price/earnings ratio at low levels. Investors will be sitting on the sidelines, with plenty of cash to invest, but too fearful to expose it to a bearish stock market.

Then a rally will begin. The market will rise rapidly - a huge surge. Each time the surge falters, more buyers will emerge, preventing any significant falls. This gives more confidence to the people with cash on the sidelines, who then start buying ..... and thus a bear market ends and a major bull market begins.

Of the emerging bull market, Zweig writes, "It feeds on itself in a frenzied fashion and propels prices considerably higher for six months or so, and sometimes longer."

Zweig uses three indicators to measure market momentum. These are an Advance/Decline Indicator, an Up Volume Indicator and the Four Percent Model Indicator.



Advance/Decline Indicator

Advance/Decline measures the ratio of rising stocks to falling stocks on - in Zweig's examples - the NYSE. It excludes stocks whose price does not change. If 2000 stocks rise and 500 stocks fall, the A/D ratio would be 4. Zweig uses the example of the rare event of a 10 day A/D ratio of two or more. If you had invested in the market as a whole each time this has happened, in the following 6 months, your investment would have risen by an average of 19 percent.



Up Volume Indicator

Up Volume is the total number of shares whose price rises. On the NYSE, the daily volume runs into billions of shares. Zweig has found that when 90 percent of the volume (excluding volume in shares whose price has not changed) is upward, significant upward momentum in the market is likely.



Four Percent Model Indicator

The Four Percent Model Indicator uses the Value Line Composite Index, which can be found on the web or in financial pages of newspapers. The model makes use of the weekly close of the Value Line Index. A buy signal is generated when the index rises four percent or more from the previous week. Similarly, a sell signal is indicated when the index falls four percent or more from the previous week.