The Economic Confidence Model & Global Financial Interconnectivity

Historically, economic growth tends to follow periods of continuous expansion and after periods of contraction. Financial markets respond to this cycle as the macro environment determines the level of interest rates and consequently the liquidity conditions for every market worldwide. In several previous articles, we have examined models of business cycles, such as:

» Ray Dalio Economic Cycles

» Gann’s Law of Vibration

» Benner’s Cycle

Below, another model is examined, Martin Armstrong's Economic Confidence Model (ECM).

Read more: Martin Armstrong's ECM Model Based on Pi {π = 3.141}

In late 2023, the famous Breadth Thrust indicator flashed a bullish signal for the stock market. Since the Second World War, it has only happened a few times. But why is this important?

-What is the Breadth Thrust Indicator?

Developed by Marty Zweig, the Breadth Thrust is an indicator that analyzes the general momentum of the stock market to reveal the times when buyers begin to dominate the market. The indicator calculates the proportion of advancing/declining stocks and is widely known for its signal at the beginning of a new bull market.

Calculating the Zweig Breadth Thrust

Mr. Zweig created the indicator by tracking the proportion of Advancing/Declining stocks (AID ratio) over ten days. The indicator is based on the NYSE and focuses on instances when oversold market conditions are moving to extremely overbought in a short period.

The signal for the new bull market

When the Breadth Thrust indicator moves from below 40% to above 61.5% within 10 days, it indicates the beginning of a potential new bull market.

■ From below 40% to above 61.5% (within 10 days)

Formula

The Breadth Thrust is simply the 10-day moving average of the following formula:

■ (Advancing Stocks) / (Advancing + Declining stocks)

Read more: Marty Zweig & the Breadth Thrust Signal for the Stock Market

INVESTING & TRADING STOCKS AND INDICES

Stock investing means gathering fundamental information and choosing stocks by analyzing them. Equity traders have access to thousands of stocks and indices from all around the globe.

Equity Investing

Technical analysis is always important but the key to equity trading is fundamental analysis.

TradingCenter's outside-in investing model

Outside-in investing means beginning by analyzing the economy and the general industry and then moving to individual corporate analysis. Our system can be implemented in five steps:

(i) Macroeconomic Landscape {identifying the stage of the macro-cycle}

(ii) Industry → Sector Analysis {technology, future growth rates, threats of substitutes}

(ii) Management Evaluation

(iii) Identifying the Corporate Strategy {Competitive advantage}

(iv) Balance Sheet

► Fundamental Analysis | ► Technical Analysis

Introduction to the Cyclicality of Financial Markets

Financial markets tend to follow specific cycles. In the long run, these cycles are forming time patterns. The identification of these patterns can optimize investment decisions. Knowing the potential starting year and completion year of each market cycle can prove very helpful to investors.

• Market cycles follow economic cycles, which are formed based on market liquidity conditions, inflation, and the interest-rate cycle.
• A market cycle includes two or four distinct phases. Each phase corresponds to specific trends that emerge during different economic conditions.
• Generally, a market cycle can range from six months to many years, or even decades.

Read more: The Cyclicality of Financial Markets and Benner’s Cycle

The Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA) is the most important and influential stock market index in the world. S&P 500 is in the second position, followed by the Nasdaq 100.

The Importance of Dow Jones when Backtesting Trading Strategies

Dow Jones is so important that if an equity-trading strategy doesn't work with Dow Jones, it can't work with any other index. Therefore, Dow Jones provides the ultimate framework for historical backtesting.

Short History of Dow Jones

Dow Jones Industrial follows the price changes of 30 US companies, and that is why it is often called Dow(30). Originally, Dow Jones Industrial was introduced in 1896 by Charles Dow. Earlier, in 1884, Charles Dow introduced the Dow Transportation Average, which is the oldest stock market index in the United States. The Dow Jones Industrial was originally used to measure the stock prices of industrial companies holding the largest reserves of raw materials. Later, the composition was expanded to include companies from more industries. From 1928 until nowadays, the composition of Dow Jones Industrial has changed 45 times. In 2009 General Motors and Citibank gave their place to Cisco and Travelers.

The Dow Divisor

The DJIA price consists of 30 stocks prices which are divided by a particular divisor. The Dow Divisor measures and excludes the effects of stock splits, reverse splits and other structural changes.

The 30 companies listed on the Dow Jones Industrial are traded either on the New York Exchange (NYSE) or on the NASDAQ.

► The Dow Jones Indices Page

Which Companies Participate in The Dow Industrial

Here are the 30 companies that are included on the Dow 30 along with direct links to their official web-pages, symbols, date of original listing and current weighting on Dow Jones Industrial (last change 2011).

Read more: The Dow Jones Industrial Average