Stock buyers were much more aggressive than sellers earlier in the week

Stock market breadth data indicated that buyers were acting aggressively Friday, much more so than sellers were during the market’s tumble earlier in the week.

The New York Stock Exchange’s Arms Index, which is a volume-weighted breadth measure, fell to 0.544, suggesting bulls exhibited near panic-like behavior.

Developed by Richard Arms about 50 years ago, the Arms Index, also known as the short-term trading index, or TRIN, is calculated by dividing the ratio of advancers to decliners by the ratio of advancing volume to declining volume. It is used by many market technicians to gauge the intensity of buyers and sellers.

As buying intensity increases, the Arms tends to fall below the equilibrium level of 1.000, as volume in advancing stocks rise relative to the number of advancing stocks. When selling is more intense, the TRIN rises above 1.000.

Many see declines below 0.500 as depicting panic-like behavior by bulls, while rises above 2.000 suggests panic selling.

On Friday, 2,229 NYSE-listed stocks gained ground (73% of the total), compared with 707 decliners, while volume in advancing stocks represented about 85% of total volume. Meanwhile, the Dow Jones Industrial Average

DJIA, +0.69%

 climbed 142 points, while the S&P 500 index

SPX, +0.68%

 advanced 0.7%. See Market Snapshot.

When the Dow tumbled 373 points and the S&P 500 shed 1.8% on Wednesday, the biggest one-day selloff in eight months, the NYSE TRIN rose to just 1.21, suggesting sellers were relatively calm and collected.

The extreme TRIN levels are sometimes interpreted as contrarian trading signals, since panic buying or selling suggests capitulation. But history indicates the predictive ability is hit or miss.

For example, the last NYSE TRIN reading above 2.000 was April 13, at 2.27. The S&P 500 index bottomed at a 2-month low that day, then rallied 2.3% over the next couple of weeks. But there was a cluster of three sub-0.500 readings between Nov. 7 and Nov. 14 as the S&P 500 rallied off a 4-month closing low on Nov. 4, but the index kept rallying, outside of shallow 1-week pullback at the end of the month.

So rather than use the TRIN as a market-timing tool, investors may be better off just using it as another measure of fear or greed.

Source: Market Watch Personal Finance

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