TRIN Switch Looks Good in the Long-Term

Bottom Line: A look at first-half corrections during Presidential election years turns up some possibly useful information – two losses in twenty-two tries.

My friend Tony Dwyer, equity market strategist at FTN Midwest Research, asked me to take a look at something that I find equally interesting concerning a pattern around Presidential elections. I have touched on this subject before, and whatever your overall opinion is of this type of analysis, I think it’s a mistake to dismiss it offhand.

The theory is that in the first half of election years, we often see the most uncertainty regarding the elections later that year. Nominees are brought to the fore, the mud begins to sling, and uncertainty builds as to who stands for what. Looking at each election year since 1916, a certain pattern emerges regarding market performance in the first half compared to the second half. The table below shows the percentage gain in the market from the end of the prior year to the highest high in the first half of an election year before a substantial correction set in. It then gives the month of the high, the month of the low (i.e. the end of the correction) and the magnitude of the correction. The last column shows the percentage gain or loss from the low of the first half correction to the end of the year. For purposes of the study, the Dow Jones Industrials Average was used prior to 1950 and the S&P 500 was used afterwards as proxies for “the market”. By “first half”, I mean a correction that began and ended before the end of July.

	% Gain/Loss from 1st of Year to High	Date of 1st-half High	Date of 1st-half Low	% Lost During Correction	% Gain/Loss from Low to End of Year
	-0.3%	01/1916	04/1916	-14.0%	11.8%
	2.5%	01/1920	02/1920	-18.1%	-20.0%
	6.1%	02/1924	05/1924	-12.8%	36.4%
	9.1%	05/1928	06/1928	-8.5%	48.5%
	14.0%	03/1932	07/1932	-53.6%	45.4%
	12.4%	04/1936	04/1936	-11.3%	26.5%
	0.6%	04/1940	06/1940	-23.2%	13.1%
	3.3%	03/1944	04/1944	-3.9%	12.8%
	-0.1%	01/1948	03/1948	-8.6%	7.2%
	3.7%	01/1952	02/1952	-6.4%	15.1%
	7.5%	03/1956	05/1956	-9.8%	5.8%
	0.8%	01/1960	03/1960	-11.5%	8.7%
	9.1%	05/1964	06/1964	-4.1%	8.0%
	1.0%	01/1968	03/1968	-10.7%	19.4%
	8.8%	04/1972	05/1972	-6.6%	13.7%
	15.5%	04/1976	06/1976	-5.9%	9.7%
	11.4%	02/1980	03/1980	-21.6%	44.1%
	2.7%	01/1984	07/1984	-12.7%	13.2%
	10.0%	03/1988	05/1988	-8.1%	11.2%
	1.0%	01/1992	04/1992	-6.8%	11.0%
	10.6%	05/1996	07/1996	-9.5%	20.2%
	4.3%	03/2000	04/2000	-12.6%	-1.4%

Average	6.1%			-12.7%	16.4%
Max	15.5%			-3.9%	48.5%
Min	-0.3%			-53.6%	-20.0%

In 2004, the S&P gained 4.6% from the end of 2003 through the peak in early March, which is right about average historically. Assuming the correction has ended, the S&P lost 6.2% from the peak to the low last week, which is less than half what we have seen on average – only 3 times have we seen a smaller correction than what we have gone through this year. Most notable is the performance of the market from the low of the correction through the end of the year. Only twice – 1920 and 2000 – has the market gone on to finish the year at a lower level than the trough of the 1^st-half correction. Obviously, prior to 2000 we were at the height of the bubble. In 1920, we saw somewhat similar action in that the Dow had run up 76% in the prior two years.

This year’s mild 1^st-half correction could be trumpeted by both bulls and bears – either it’s a sign that there’s more downside to come, or it’s a sign that the market is exceptionally strong. My take is that when the market corrects less than average, it is a sign of strength, not potential future weakness.

Bottom Line: Like a bad habit, the TRIN is getting our attention. Short-term switches in the 5-day average have had only one “failure” since 1950.

After swearing off writing about this indicator a week ago, I find myself having to fall back on my word and bring up the TRIN once again, as it is throwing off readings that should be discussed. As I showed ad nauseam a couple of weeks ago, the NYSE TRIN was giving oversold readings on an historic scale. Now we find ourselves on the opposite end, as the indicator has averaged a measly 0.60 over the past four trading days. This is the lowest four-day average since the low in March 2003, and the low in October 2002 before that. Prior to those two occurrences, we would have to go back to December 1990 to get a similar reading.

While such a low TRIN spread out over a few days is normally considered overbought, I believe it has more important longer-term ramifications. Not simply because it reached such a low level, but because it did so after the extreme oversold readings we were seeing just a few short days ago. In fact, such quick switching between lopsided selling pressure to lopsided buying pressure is very rare – since 1950, there have been a total of 13 such instances. By “instance”, I am referring to a 5-day TRIN of 1.5 or above that drops to a 5-day TRIN of 0.75 or below within 5 trading days.

EXTREME TRIN SWITCH 5-day TRIN Going from >1.5 to <0.75 within 5 Days S&P 500, 1950 - 2004
Date	10 Days Later	30 Days Later	60 Days Later	90 Days Later	126 Days Later	252 Days Later
12/09/50	1.4%	9.1%	10.9%	9.8%	13.2%	16.2%
06/22/53	1.4%	3.3%	-3.6%	2.6%	4.8%	23.7%
10/20/55	0.9%	6.4%	3.3%	6.3%	10.8%	6.2%
07/03/62	-1.4%	4.7%	-0.9%	6.3%	13.4%	23.1%
05/17/79	-2.6%	-0.1%	3.8%	5.1%	-3.1%	-2.4%
12/17/80	4.8%	2.0%	8.0%	9.5%	7.2%	-6.4%
11/25/86	1.1%	4.9%	15.9%	25.8%	20.8%	2.7%
11/02/87	-3.2%	-3.6%	-4.2%	1.0%	2.2%	6.7%
11/23/88	2.4%	5.1%	11.2%	10.2%	18.7%	27.0%
11/05/90	2.5%	5.0%	9.4%	17.8%	16.6%	21.7%
04/24/00	-2.8%	-1.6%	-1.9%	1.8%	-6.2%	-4.1%
10/14/02	6.2%	12.3%	11.4%	-0.2%	6.7%	24.6%
03/18/03	-1.5%	3.5%	12.2%	13.3%	16.8%

Average	0.7%	3.9%	5.8%	8.4%	9.4%	11.6%
% Positive	62%	77%	69%	92%	85%	75%

We can see from the table that up to 10 days later, the S&P was higher a majority of the time, but the average return was lackluster. I didn’t show the results for 5 days later, but they are essentially identical to the ones from 10 days later, suggesting the market typically needed some consolidation time before making a move of any substance. After 30 days, however, the S&P was higher more than 75% of the time and showed a respectable average return of nearly 4%. After 90 days, the S&P gave only one failure – a small loss after the October 2002 low – which turned out to be the 2^nd-largest gainer of the group after one year.

As I said last time, I have pointed out several intermediate-term positives over the past week or so, almost exclusively related to various breadth patterns. I’ve only added to that this week with the “Thrust & Parry” I wrote about this past weekend, and the TRIN switch in today’s comment. I guess the picture is clear and it’s now bordering on overkill – the breadth patterns we’ve been witnessing are very bullish historically. All of them allow for some short-term weakness, but the longer-term returns are very consistent and very positive. I don’t think they should be dismissed lightly.

Still, we have not seen anything near excessive bearishness that normally accompanies intermediate-term lows. It would be unreasonable to expect to see readings near what was seen at other lows in the bear market of 2000 – 2003, but I don’t think it’s unreasonable to see some type of uncertainty enter the market. I suppose it can be argued that we have seen a little of that, in terms of some of the put/call ratios and Rydex asset movements (see the discussion of the Electronics fund from last week), but those are a small consolation. Over the past few days, the broader market has done remarkably well in the face of some severe short-term overbought conditions as identified by our models. The fact that we’ve simply churned instead of collapsed is a major positive in my eyes, and makes me believe we may not get the additional push down I had been looking for. I’ve been saying that I am using a rally (and hold) above the 1125 level on the S&P as an initial indication the correction may be past, and we’re teetering there as I write. The short-term overbought condition we’re in now goes against a significant rally over the coming days, but it was saying the same thing before Monday’s rally. Bottom line, I don’t want to be short above 1125, but I don’t want to be aggressive with short-term long positions either due to the sentiment situation. I’m in wait-and-see mode for now.

This disclosure is not intended as trading advice in any form. It is meant as a note to subscribers that the author may have a position directly affected by the market outlook reflected in the commentary. Although the author takes great pains to remain objective in any commentaries, it is only fair that readers should know that the author may have taken positions in accordance with his market outlook. Positions can and do change at any time, without notice to the reader.