Why a high TRIN won't work:
cross-currents.net
The Arms Index (a/k/a TRading INdex = TRIN) has been a valuable technical tool for many years, allowing observers to sometimes accurately gauge overbought and oversold levels and to act accordingly. Unfortunately, the indicator has now been undeniably busted by unique circumstances.
The primary factors that conspired to end the effectiveness of the TRIN were 1) eleven straight interest rate cuts and 2) that almost half the stocks now trading on the New York Stock Exchange are interest rate sensitive. Given the accomodative stance of the Federal Reserve, these issues tended to rise in price but traded on typically low volume as opposed to operating company issues that traded with larger daily volume.
For the sake of argument, take two equal halves of the market. The interest rate sensitive portion trades with 1000 issues up, 500 issues down, 50 million shares up, 15 million shares down. The operating company half trades a mirror image of 500 issues up, 1000 issues down, but with much larger volume, 100 million shares up, 333 million shares down.
On the surface, it appears equal. Interest rate sensitive issues were 2:1 A/D and 3.33 Up Volume/Down Volume. Operating companies were 1:2 A/D and 1:3.33 Up Volume/Down Volume. Total issues up = 1500. Total issues down = 1500. Total up volume = 150 million shares. Total down volume = 348 million shares. TRIN = 2.32, an extremely oversold daily reading!!!
Thus, since the first day of 2001, the indicator has been rendered useless.
[ED NOTE: there is also some speculation that Decimalization may have played a role in impacting the effectiveness of the TRIN.]
Consider the following. Typically, when the 21-day TRIN gets to 1.2, the market is hugely oversold and this mark acts as a terrific buy signal. Yet, since January 1, 2001, the 21-day TRIN has been 1.20 or above 49.6% of the time! Yet stocks cannot seem to rally very far, if at all.
Even "normal" readings of 1.00 have become rare, and have occurred only 4.6% of the time.
All one need do is glance at the chart. The trend is obvious. Will it ever change? Undoubtedly, but we're not about to pin our hopes on the extreme high TRIN readings to buttress any case for the bull. For the time being, the picture clearly continues to fortify the bear case. |
