Friday, August 28, 2009

Why is TRIN (Arms Index) So Low?

A few readers have asked this question, noting recent low TRIN values. (TRIN is also known as the ARMS Index). Of course, what this means is that a high proportion of daily trading volume has been concentrated in rising stocks.

But is TRIN low?

To address this, I looked at the median 20-day TRIN values going back to 2000. I used the median because the TRIN ratio is constructed in such a way that you can get much larger readings above 1.0 than below. With the median, I wanted to capture whether the average day was showing greater concentration of volume to the winning or losing stocks.

Guess what? The current 20-day median TRIN is the lowest value we've seen since 2000 at around .75.

I'm not exactly sure what to make of that. What I can tell you with certainty is that two of the past historical occasions in which we've had 20-day price highs and ultra low median 20-day TRIN readings have been March, 2000 and late May/early June, 2007. Both corresponded more or less to bull market peaks.

The ultra low TRIN seemed to capture frothiness in those markets: lots of volume going into a few speculative, rising issues. Might we be seeing the same thing with the recent pops in such low priced stocks as AIG, C, FNM, FRE, CIT, and BAC? I note that about 2 billion of NYSE volume was concentrated in C, FNM, and FRE alone. Seems like lots of money chasing low-priced volatile financial stocks.

Just like lots of money chasing volatile tech stocks or emerging market stocks. Not something you'd see at market bottoms. A bit of a sentiment caveat for this market shrink.