#141: ARMS RACE

S2N Spotlight

For those of you who have been following the markets for a long time, you will probably have come across the TRIN Index, also known as the Arms Index (named after its creator, Richard Arms, in 1967). It is a contrarian indicator that brings volume into the picture. We have looked at breadth before, but looking at breadth on its own can be misleading. We are looking for clues to tell us whether the market is overbought and due for a correction after making one new all-time high after another. The TRIN is apparently a powerful indicator for identifying extremes.

The TRIN is calculated using the following formula:

I have included the formula for completeness. In plain English, it is easier to use these definitions:

TRIN = 1: This suggests a balanced market with equal volume going into advancing and declining stocks.

TRIN < 1: More volume is flowing into advancing stocks than declining stocks, indicating bullish market conditions.

TRIN > 1: More volume is associated with declining stocks, suggesting bearish market conditions.

I start by using the NYSE TRIN, this includes all the 8,000 stocks on the New York Stock Exchange. I have created markers of red sell when the TRIN is above 5 and green when below 0.50 the current reading of 1.24 is only midly bearish.

I did the same analysis but this time on just the S&P 500 stocks. Once again 1.34 is only mildly bearish.

For completeness, I applied the same criteria on the AMEX, which has about 5,000 stocks and includes many smaller, younger companies. The TRIN of 4.83 is a lot more bearish.

Tomorrow I plan to look at some other volume-based indicators.

S2N Observations

Everyone is talking about the yield curve un-inverting. Sometimes it is helpful to just look at the yield curve over the last few weeks.

I haven’t been following copper that closely but it looks like it has something to say.

In the chart above, I created a ratio of copper over the S&P500. It is making 20-year lows, so we should take note. I created a simple signal sell rule for when the ratio drops below 0.1 within the last 252 days. I am not saying this is a reliable signal but one I am taking note of.

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