For decades, investors have used the S&P 500 Index as the benchmark for U.S. stock performance. Index funds tied to it have grown enormously, with a total market value of about $20 trillion, as of Dec. 31, 2024—and that number continues to rise.

To attract even more assets, the financial industry has developed a variety of specialty S&P 500 funds, slicing and dicing the Index using different factors:

• S&P 500 Growth: Focuses on S&P 500 companies expected to grow earnings at an above-average rate relative to the market.
• S&P 500 Momentum: Tracks stocks in the Index with high “momentum scores.”
• S&P 500 High Dividend Low Volatility: Includes 50 securities from the S&P 500 that have historically delivered high dividend yields and low volatility.

We could go on, but you get the point. But what if there were a factor that offered the potential for significantly higher returns—and did so consistently?

We turned to breadth thrusts for the answer. A breadth thrust is a rare technical indicator in stock market analysis that signals a sudden and powerful shift from pessimism to optimism, suggesting a potential new bull market. There are more than a dozen types of breadth thrusts, many of them complex and difficult to calculate or track. We picked one with simple rules that is easy to calculate and follow.

The three-day price thrust indicator

The three-day price thrust indicator occurs when the S&P 500 Index rises at least 1.5% on one day, at least 1.15% on the second day, and at least 1.5% on the third day. Historically, each thrust has led to the market being profitable one year later.

We thank Ned Davis Research for the history on this indicator. Using the indicator in building a better S&P 500 factor model is our contribution.

To test this approach, we developed a simple rule set for incorporating the indicator into an S&P 500 strategy:

1. Buy and hold the S&P 500 Index using the SPDR S&P 500 ETF (SPY) (S&P 500 Index with dividends).
2. When a three-day price thrust indicator signal occurs, move from the SPY to the ProShares Ultra S&P 500 ETF (SSO)—which seeks to deliver twice (2X) the daily performance of the S&P 500—on the following trading day.
3. Hold the SSO position for the following year.
4. At the end of the one-year period, sell the SSO position and move back to the SPY position.
5. If another three-day price thrust signal occurs during the one-year holding period, start a new one-year cycle from the most recent signal.

Performance history for the price thrust strategy

The three-day price thrust indicator has fired only eight times over the past 16.75 years.

Table 1 shows the performance of the SPY ETF and the SSO ETF over the following three-, six-, nine-, and 12-month periods after each signal.

Note: The start date for calculating performance is the next trading day after the three-day price thrust signal. Closing prices were used. MDY = Market days.

Sources: NDR, FastTrack, STIR Research

The three-day price thrust indicator has historically been very accurate in identifying new emerging bull markets. Just compare the performance for the SPY with the mean of all periods over the same three, six, nine, and 12 months. The SPY’s performance following a thrust signal was typically three times better than average. That made it an excellent time to add the advantage of SSO’s 2X exposure and magnify those returns—the goal of the S&P price thrust tactical strategy.

The only challenging period was the Jan. 2, 2009, signal, which arrived roughly two months before the market’s ultimate low. Even so, the strategy quickly recovered. By the ninth month, it was adding value—and it finished the 12 months with a 44.38% gain versus 25.32% for holding the S&P 500.

Sources: FastTrack, STIR Research

Over the whole period analyzed, using the price thrust factor to enhance S&P 500 performance proved impressive. The indicator was active for just 76.5 months of the 210 months studied, or about 36% of the time. It added value in nine years, with the best year in 2021, when it boosted returns by 3,031 basis points—a 59.05% gain for the price thrust strategy using SSO versus 28.74% for the SPY. It underperformed in only two years, the worst case being 2010, when it lagged by 338 basis points (11.68% versus 15.06%).

Bottom line: Across only eight signals over the past 17.75 years, the total return from this tactical approach was roughly three times that of a buy-and-hold strategy.

The opinions expressed in this article are those of the author and the sources cited and do not necessarily represent the views of Proactive Advisor Magazine. This material is presented for educational purposes only.