Here’s why you should know what
a nine-to-one day is

By Jason Chow
Globe Investor magazine online, March 28, 2008

To a small group of market observers, the phrase “nine-to-one” is not about ideal working hours. Rather, it’s a little-known market indicator that’s flashing strong bullish signals that we haven’t seen in a very long time.

Developed over two decades ago by market guru Martin Zweig, the nine-to-one indicator is a simple concept that traces where the volume of market action is going. It has a small number of fans but it has garnered quite a lot of buzz in the past two weeks.

Here’s how the indicator works: Take all the volume of all the NYSE-listed stocks and figure out what percentage of that volume came from stocks that rose on the day. For example, if the number of shares traded of companies that rose was exactly the same as the volume of stocks that dropped, then the percentage would be 50 per cent.

Now, 50 per cent is nothing worth writing home about, but Mr. Zweig, whose two claims to fame are his famous prediction of the 1987 crash on the weekend before it happened and his owning the eighth-most expensive home in the world (a Manhattan penthouse apartment atop the Pierre Hotel worth $70-million (U.S.), according to Forbes), says this percentage of volume of rising stocks becomes significant when there’s a “nine-to-one up day.”

This happens when 90 per cent of the volume of a day is devoted to rising stocks and he says it’s an important bullish signal for stocks. This happened most recently on March 18 on the New York Stock Exchange when the S&P index rose 54 points to 1,331 for a dramatic 4.2-per-cent one-day gain. On that day, more than 95 per cent of the total volume traded on the NYSE was on rising stocks.

If one nine-to-one up day is good, two is even better.

Mr. Zweig calls this the “double nine-to-one signal” when there are two nine-to-one up days in a reasonably short period of time. Markets did exactly that this month: Exactly one week before this dramatic upswing, the market enjoyed a nine-to-one day when the S&P 500 index rose 41 points to 1,221 and 90 per cent (89.998 per cent to be exact) of the total volume that day (March 11) came from stocks that rose.

A recent academic study has confirmed the significance of this signal. Finance professor David Aronson at Baruch College ran a study that went back to 1942 to see what happened in the 60 days that followed a double nine-to-one bullish signal. The results: The S&P 500 index produced an average annualized return of 22 per cent. On all other periods when there wasn’t a bullish signal, the market only gained an annualized return of 4.5 per cent.

Of course, this signal isn’t always right. A double signal was triggered in November and the market subsequently fell in the following two months. Also, there have been several more downside nine-to-one days than rising ones, though Zweig has argued that the up days are statistically significant while the down days aren’t.

But Mr. Zweig’s nine-to-one signal isn’t the only indicator that has gone from bear to bull in recent weeks. Take the contrarian-minded investment adviser sentiment indicator from research firm Investors Intelligence.

The firm polls financial advisers each week about how they feel about the market and two weeks ago, the poll showed that there were 13.8 per cent more bears than bulls among those polled – the largest bearish contingent since the last severe bear market of October 2002. That ratio has since narrowed to 4.4 per cent last week and Investors Intelligence said the indicator had issued a buy signal accordingly. The message: The bear camp is oversaturated and the tide is turning back towards the bull side.

Some technicians have also seen some silver lining in the recent bottoms, pointing out that fewer stocks are hitting new lows, which prompts some chartists to wonder if most stocks have already placed their bottoms. Consider this: When the S&P 500 index hit its intraday low at 1,270 on Jan. 22, a total of 1,865 stocks hit their new 52-week lows. However, on March 19, that low level was tested again, but only 1,236 stocks hit new lows. According to Mark Arbeter, a market technician at Standard & Poor’s in New York, this means the “internal makeup” of the market is getting better.

It’s hard to be fully convinced of a rebound when considering the whipsaw action of the markets this year. But slowly, the technicians are mounting evidence with their indicators that the time has come for the bull run to begin.

Special to The Globe and Mail