When the Market is Up on Concentrated Selling

We have an unusual situation in which the S&P 500 Index (SPY) is up on a five-day basis thanks to yesterday's rally, but the NYSE Arms Index (TRIN) has been over 1.0 each of those five days. What this means is that volume has been concentrated in the falling stocks despite the fact that stocks overall have not been falling.

What happens when the five-day Arms is high, but the market is up over that five-day period? Does the bull go away or is it one big holiday?

First let's start with basics. Since 2003 (N = 842 trading days), we've had 211 days in which the five-day Arms Index has averaged over 1.0. Four days later, SPY has been up by an average .68% (143 up, 68 down). That is much stronger than the average four-day gain of .06% (335 up, 296 down) for the remainder of the sample.

When the five-day Arms Index has averaged more than 1.0 and SPY has been up over that five-day period (N = 50), the next four days in SPY average a gain of .88% (39 up, 11 down). That's a helluva edge.

I took a look at the high Arms/up SPY periods since 2005 to detect evidence of changing cycles (N = 20). The next four days in SPY averaged a gain of .46% (14 up, 6 down)--still a considerable upside edge.

In short, when stocks overall are strong but volume is concentrated in weak issues, the outlook for the market has been bullish. On average, it takes volume chasing the rise to put an end to the bull.