The Arms Index (also known as the TRIN) was above 2.0 yesterday for the first time this year. This is significant because previous spikes above this point have marked some near-term lows. The Arms Index is an indicator that compares advancing and decline issues, and trading volume in those advancing and declining issues. To keep this simple, when it has spikes above 2, that is showing most of the volume is going into the declining issues. Thus, there is potential for a washout in sellers. When you consider the big reversal off the lows today, we feel this signal yesterday could be more significant.
In 2013 and 2014, few indicators worked better at finding near-term lows. Last year, it had more signals as volatility increased, but again it did well in finding at least short-term lows. In fact, this signal triggered 17 times last year, and five days later the S&P 500 was up 1.1% on average and higher 88% of the time.
It is worth noting though that the last time this triggered was December 30, 2015, and the S&P 500 dropped nearly 6% the next five days. So much like all signals, they don’t always work.
When the Arms Index Spikes Above 2.0, It Could Be Signaling a Near-Term Low
Source: LPL Research, StockCharts 02/03/16
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
TRIN = (advancing issues / decline issues) / (advancing volume/decline volume). Values above 1 indicate the market is acting more bearish; below 1 indicate that it is acting more bullish. This short-term indicator is used to mark bullish or bearish extremes.
Past performance is no guarantee of future results.
The economic forecasts set forth in the presentation may not develop as predicted.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.
Stock investing involves risk including loss of principal.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Arms Index, or TRIN (the “Trader’s Index”), is a short-term contrarian technical analysis indicator based on advance-decline line data, developed by financial consultant, Richard Arms in 1967. The measure looks at price and volume covering all stocks on the NYSE. The index is calculated based on number of shares traded, not their dollar value. Therefore, a highly traded stock with a low share price will affect the index more than the same dollar volume traded in a higher-priced stock.
Technical analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical analysis should be used in conjunction with fundamental analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.
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