S&P Strength and TRIN: Another Look at Efficiency

The S&P 500 (SPY) has approximately 2.2% in the past 3 days on an average TRIN reading of .69. I went back to March, 2003 (N = 759) and found 51 occasions in which we had a three-day period with a rise of more than 2%. The average three-day TRIN for those occasions was .80, indicating that we have had an above average concentration of volume in rising issues.

Six days following the three-day rise, SPY has averaged a gain of .70% (35 up, 16 down), much stronger than the three-day average gain for the overall sample of .36% (446 up, 313 down).

When we break the strong occasions in half based on three-day TRIN readings, however, a distinct pattern appears. When SPY is strong and the TRIN is lower than average (higher concentration of volume in rising issues), the next six days average a gain of only .03% (13 up, 12 down). When SPY is strong and the TRIN is higher than average, the next six days average a gain of 1.35% (22 up, 4 down).

Once again we can understand the results in terms of market efficiency. When it takes a greater concentration of volume in rising issues to achieve a particular rise, the market is less efficient and subsequently produces subnormal returns. When the market is more efficient--able to generate a given rise without a commensurate concentration in volume--returns following strength tend to continue the strength.

The results suggest that it may be difficult to generate the upside followthrough normally associated with a strong three-day gain.