The disappointing Fed action on interest rates seemed to provide
a reason for a loss of reason! After a number of indecisive
swings on the news, the markets all started to drop
precipitously. As that happened, volume swung heavily to the
sell side. By the close we were seeing volume on the down stocks
on the NYSE almost twice as heavy as volume on the up stocks,
proportionately. The figures were even more lopsided on the
Nasdaq. At the close the down stocks were getting almost four
times their share of the volume!
Putting these numbers into the moving averages of the Arms Index,
it put the 5-day Nasdaq at 1.88 and the 10-day at 1.87. On the
NYSE the 5-day is now at 1.64 and the 10-day is at 1.58. Those
numbers are, I think, very important at this time. I usually
consider a level over 1.25 on the NYSE as being very oversold,
and a signal that a buy point is being approached. A level of
1.50 or higher is extremely rare, and has always been seen in the
vicinity of a major market low. In the 32 years since the data
has been available to calculate the Arms Index there have only
been six other times when it has moved to a level over 1.50. The
most significant was at the October 1987 panic. The next biggest
oversold was in October 1997, at the time of the Russian
meltdown. The others were in 1970, 1975, 1980 and 1982. Each
was at or very close to the market low of that period.
The message seems clear. We are seeing oversold levels that are
rare, and have always, in the past, pinpointed a time to be
aggressively buying stocks. It is hard to go against the crowd
when the bearishness is so widespread. Being contrary at
important turning points has always been extremely difficult, but
extremely profitable. We seem to be at, or near, such a point. |
