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On Monday, September 12th, the market generated a rare breadth signal. The Arms Index (TRIN) registered back-to-back readings below 0.50 for only the eleventh time since 2000 and for the first time since 2015. This event can be interpreted as bullish, but perhaps not immediately bullish. Bulls now want to see the S&P 500 respond with a move above its 50-day moving average and the 4,200 level. 

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A Rare Event

The Arms Index, also known as the Short-Term Trading Index (TRIN), is an indicator that compares the ratio of Advancing to Declining stocks on the NYSE to the ratio of Advancing and Declining volume. Lower readings are generally considered bullish because it indicates greater volume in the stocks that are rising than in stocks that are falling. 

TRIN = (Advancing Stocks / Declining Stocks) / (Advancing Volume / Declining Volume)

On Friday September 9th and Monday September 12th, TRIN registered two readings below 0.50.

Prior to this week, this rare event has happened 10 times since 2000. In those prior instances, the S&P 500 was higher 63 days (three months of trading) nine times. The table below highlights these past instances, along with the percentage change in the S&P 500 from the closing price on the day following the signal. We also include the Maximum Adverse Excursion (MAE), which is the maximum amount the S&P 500 was down while the signal was open.

While the signal can be interpreted as bullish, we note that the MAE data indicate that the market may not immediately take off.

Data Source: Amibroker, Norgate Data

What Does it Mean?

A rare event catches our attention and generates some potential for upside in the equity market. However, the bulls have been tripped up by bullish breadth signals multiple times this year. Ideally, they want to see the S&P 500 regaining its 50-day moving average and then the 4,200 level. We are watching closely.

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Disclosure: This information is prepared for general information only and should not be considered as individual investment advice nor as a solicitation to buy or offer to sell any securities. This material does not constitute any representation as to the suitability or appropriateness of any investment advisory program or security. Please visit our FULL DISCLOSURE page.