CBI Hits 10 – Some Hypothetical Results

The Capitulative Breadth Indicator (CBI) closed at “10” on Tuesday (July 1st). Historically, this has been a reliable indication that the market is nearing a bounce. Using backtested data from 1995-2005 and live data from 2005 forward, there have been 18 instances when the CBI reached at least 10. Buying the S&P when it hit 10 and selling on a return to 3 or lower would have been profitable all 18 times. Below are some summary statistics ($100,000 per trade):

The max drawdown is important to keep in mind. A CBI of 10 is not magic. It doesn’t guarantee anything. It’s indicating that downside breadth is overdone. This shouldn’t be a revelation. Last week I showed another breadth indicator that was also overdone. It still is. Hopefully the market does what breadth says it’s supposed to do soon.