Arms Index Climax May Signal Market Bottom

The Arms Index or TRIN is an indicator that I watch closely for short to intermediate-term setups. The indicator which combines ratios of advancing issues to declining issues and advancing volume to declining volume is a reasonably reliable contrary signal.

Since mid-October the Arms Index has been generating a number of historically high signals. In the chart below, I used a 10 day exponential moving average as a smoothing factor. Note that the TRIN’s 10 day EMA appears to have climaxed Monday in the manner that has historically provided excellent buying opportunities. To my ears, Monday’s climax in the TRIN is suggesting that the November 21st bottom is likely to hold. Shorts beware…

Comments

[herbert hoover:]

another bottom? sooner or later someone has to be right

2008 Dec 02 07:26 PM

[MarvinMBA:]

Wow the magic of statistics and smoothing data and history and the future...I hope you are right but where is the job growth and future money to come from to grow the economy???? Some stocks will perform on fundamentals and others will just be part of the market Beta. Companies like NNVC.OB are rising on fundamentals and will be part of a resurgent market...look for these that will be contributing in the future and forget about the overall market...MarvinMBA

2008 Dec 02 07:39 PM

[alancelt:]

Spikes can always spike higher and the market could drop further from here. Spikes are only clear in hindsight when the second half of the spike - the return to trend - is in place. Remember how the VIX spiked in late October and again in late November at a lower low. I hope you are right about this bottom, but don't count on it.

2008 Dec 02 07:44 PM

[Steven Hansen:]

bill, sorry but you have already proven that watching charts is not working during this economic event:

seekingalpha.com/artic...
seekingalpha.com/artic...

i don't think we have reached a bottom but this is only a guess. but it should be obvious that following the tea leaves of numeric analysis during this event has left users with very large haircuts.

2008 Dec 02 09:03 PM

[Roger Knights:]

I think we've reached a bottom for this year.

(Guarantee: This prediction is "safe as houses.")

2008 Dec 03 02:35 AM

[AaronDB:]

Bill,
I think your observation is a good caution for shorts. I've noticed in my technical analysis that in this unprecedented bear market, many of the indicators that measure extreme conditions or turning points under normal circumstances are baffling technical investors right now as incredible conditions persist.

While there are other reasons to believe 11/21 is a low for now, I'm a little more cautious on calling it given the extreme nature of this bear market.

2008 Dec 03 05:54 AM

[John Lounsbury:]

Bill - - -

Some of the skepticism other commenters have expressed is related to perspective. The TRIN is a decent short-term indicator for traders, but has little relevance for longer-term investors.

2008 Dec 03 10:56 AM

[Did U Think...:]

Thanks for your words of caution. Of course, you are only referring to a short term bottom, right? I mean, we just lived through the greatest expansion in credit in the history of man, worse than the roaring 20s, so I can't believe anyone really thinks we are going to get out of this with any less of a peak to valley collapse than happened 1929-1933. There is nothing going to save us from that. Hint: it would break the Nov lows you mentioned in order to do that since the great depression saw the Dow lose ~89% of its value before bottoming.

2008 Dec 04 02:35 AM