Roque's Gallery
TRIN or Treat: A Closer Look at the Arms Index
By John Roque
Special to TheStreet.com
09/04/2001 06:58 AM EDT
URL: thestreet.com
The Arms Index (developed by Richard Arms in 1967), or TRIN (trading index), is the current technical indicator du jour. At the beginning of the year and through April, it was the Chicago Board Options Exchange Volatility Index, or VIX. Over the past several months, it's been cumulative breadth. Now it's the Arms Index.
What It Is
By definition, the Arms Index shows the relationship between the number of stocks rising or falling (advancing stocks/declining stocks) and the volume associated with those either rising or falling (advancing volume/declining volume). Conceptually, the Arms Index shows if volume is associated with advancing or declining stocks. So, if more volume is associated with advancing stocks vs. declining stocks, the Arms Index reads less than 1. If more volume is associated with declining stocks vs. advancing stocks, it comes in at more than 1.
I've gotten a lot of calls lately from clients and contacts asking for my take on the Arms Index. Some have gone so far as to state, "So-and-so's TRIN indicator is flashing a buy signal. And ever since Moses turned his back on the Egyptians (that's my poetic license, but you get the gist of it), it has always been right to buy when the TRIN is this high." With this sort of clamor, I figured I'd better do some work on the Arms Index. Here's what I found.
First off, my daily data go back only as far as 1965. (For those keeping score at home, that was when Johnny Keane guided the Yankees to a sixth-place finish and Casey Stengel and Wes Westrum piloted the Mets into a 10th-place finish.) Therefore, I can't corroborate any of the findings when Moses was running his fund, although I still found some interesting data points.
A History Lesson
I looked at the daily Arms Index number and the 10-, 21- and 55-day moving averages, and found the most success with the 10-day moving average. But those who use the 10-day moving average to get bullish/aggressive are missing one key element: the combination of the daily Arms Index number and the 10-day moving average.
From March 1965 to 1978, the 10-day Arms Index registered a reading of 1.5 or greater on 22 instances. The readings were clustered near the October '66 market bottom, the May '70 bottom and the October/December '74 bottom. However, the 10-day readings were made impressive by the fact that there was a "capitulative-type" day in which the daily number reached at least 3 -- meaning that the volume associated with declining stocks was 3 times that of the volume associated with advancing stocks. For example, on Oct. 3, 1966, the Arms Index was 3. On May 4, 1970, it was 3.5, and on Nov. 18, 1974, it was 4.25.
From 1979 to 1992, the 10-day Arms Index registered a reading of 1.5 or greater on 26 instances. The readings clustered near the March '80 bottom, the August '82 bottom and, of course, the October '87 bottom. Again, however, the 10-day readings were made more impressive because daily readings show 3.93 on March 24, 1980, and 14.1 on Oct. 19, 1987. The 1982 bottom was the only period I found in which no daily reading measured at least as high as 3.
From 1992 to date, the 10-day Arms Index registered a reading of 1.5 or greater on 23 instances. The readings were clustered around the October '97 selloff, the March '01 low, Aug. 14-21, 2001, and Aug. 29 and 30. Remarkably, the 10-day Arms Index did not get above 1.5 once from July to October 1998. Again, the 10-day readings were more impressive because the daily readings show 10.3 on Oct. 27, 1997; 3.42 on March 12, 2001; 3.14 on April 3, 2001; and 4.31 on April 14, 2001. However, there has not been a reading above 2.64 since July 24, 2001.
Perhaps there's been no high daily reading because investors are still trying to pick the bottom. Perhaps it's because investors have been taught to buy the dips, so they feel compelled to put some money to work whenever the indices are down big. Whatever the reason, the inability to achieve a give-up, bid-wanted, capitulation-type day suggests that until we record a high daily Arms Index number, it's still a very good idea to sell bounces.
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With the pennant races heating up, I thought it'd be a good idea to include a trivia question. The first correct answer will get a copy of The Best American Sports Writing of the Century.
Here's the two-part question: In The Godfather, Part II, Michael Corleone and Frank Pentangeli are discussing some business.
What is Pentangeli's nickname?
What does Pentangeli call Johnny Ola, the gopher/worker for Hyman Roth?
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John Roque is the technical analyst at Arnhold & S. Bleichroeder, a New York-based investment brokerage firm specializing in Europe and the U.S., and a frequent guest on CNBC. At time of publication, Roque had no position in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback and invites you to send it to John Roque.
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