the TRIN buy signal..........
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September 7, 2001
Bullish call to Arms
Joe Dancy, manager of the LSGI Technology Venture Fund, publisher of the LSGI Technology Market Letter
members.aol.com, as well as the Lone Star Growth Investor Update members.aol.com, provides the
following article. Below is his write-up.
"I can't believe it," writes Ralph Bloch, analyst at Raymond James, about the Arms Index closing above 2.0 on two consecutive days last week. "This is one of
the rarest occurrences in the world of technical analysis."
The Arms Index measures advancing and declining volume from the markets, and converts that data into a ratio that represents selling volume divided by buying
volume. Many times the experts use a moving average of this ratio to smooth out daily fluctuations. When the ratio falls below 0.7 that tends to be bearish
because the market is "overbought," and when it rises above 1.5 that tends to be bullish because the market is "oversold."
Bloch continues his note by stating that it has "been 14 years since that happened" -- which is why he terms it a rare occurrence. The last time the average
closed at these levels for two consecutive days, October 16 and October 19 of 1987, the market went up 16.6 percent in two days, and, according to his
research, it signaled the absolute bottom of that particular slump. Before that, the previous time the averages closed at these levels was August 3 and August 4
of 1982 -- the start of the great bull market, according to Bloch.
Bloch says he thinks this signals a tradable rally at least, if not necessarily new highs, and the market usually moves within about seven days.
Eighth Strong Buy in 34 Years
Richard Arms, creator of the index, has also noted that the moving average of the daily Arms Index is at very bullish levels for the market. "This is the eighth
time in the last 34 years that we've seen such [strong buy] signals" according to Arms, who claims that the signals have been very accurate.
The previous seven buy signals were "in 1970 at the bottom of the market. After that I think the move was something like 40 percent. In 1972 at the bottom of
that major market move."
Arms contiunes: "The next time was 1980, market bottom. In 1982 just before we started the biggest bull market in the century, I would guess, you know an
18-year bull market. And then, in '87 when the market broke so sharply in October of '87 right on the bottom. We got the same sort of a reading. Then in '97
when we had the Asian debacle in October of '97 we got the same sort of thing."
Why does this index work? Arms claims that sellers tend to overdo things, become much too pessimistic, and signal their capitulation with their strong selling
into a declining market.
Valuations Matter
Regardless of the technical indicators, we believe in the proposition that over the longer term investors buying a diversified portfolio of profitable, undervalued, yet
growing companies should outperform the market. The long-term performance of our portfolio confirms the validity of our investment strategy. |
