Bullish call to Arms
September 7, 2001
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. |
