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  Arms Index Makes A Big Switch

September 2, 2010

 

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This is an abbreviated sample of a comment posted for subscribers

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Another day, another crazy breadth reading.

 

Once again, the all-or-nothing market shone through, this time to the upside.  More than 96% of all volume on the NYSE flowed into issues that were up on the day, one of the largest ratios we've seen in months.

 

The number of issues themselves that were up on the day wasn't quite as impressive, which skewed the Arms Index (also known as the TRIN).  Since the Arms Index is the ratio of Up Issues to Up Volume, when Up Volume is the greater of the two, it pushes the TRIN lower.  In this case, much lower.

 

 

The table below shows how the S&P 500 fared going forward when the TRIN was 0.25 or below when the S&P had been within 1% of a one-month low before the buying spurt.

 

Date

1 Day

Later

1 Week

Later

2 Weeks

Later

1 Month

Later

3 Months

Later

09/27/55 1.7% -1.7% -6.4% -6.4% 3.4%
10/23/57 -0.1% 0.7% -0.2% -0.2% 2.4%
10/24/62 -0.9% 2.4% 5.6% 5.6% 19.4%
09/02/88 0.4% 0.8% 1.6% 1.6% 2.8%
10/28/97 -0.3% 2.1% 0.2% 0.2% 6.9%
01/02/03 -0.1% 2.0% 0.6% 0.6% -3.6%
06/15/06 -0.4% -0.8% 1.3% 1.3% 4.8%
10/28/08 -1.1% 6.9% -4.4% -4.4% -10.1%
         
Median -0.2% 1.4% 0.4% 0.4% 3.1%
% Positive 25% 75% 63% 63% 75%

 

This is relatively expected - we normally see some short-term back-and-forth after such a skewed day, and for the most part it tends to be more bullish the longer-out we look.

 

There were only two times when we saw a TRIN at 0.25 or below within a few days of it being 3.0 or above, like it was on Monday.  Those were 10/28/97 and 1/2/03.  The former was a signal that we were in the midst of a major bottoming process; the latter not so much as the S&P slid for two months before bottoming.

 

I would normally be more interested in exploring some of the implications of buying pressure like we saw yesterday in terms of market breadth, but as we've discussed many times over the past year, we seem to be in a different world now than we were prior to 2007 or so.  Whether its the proliferation of ETFs or High-Frequency Trading, or whatever, breadth extremes just aren't as reliable when they become so common, and so often switch from one extreme to another within days.

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