What does the Arms Index tell us? (April 4, 2001)
The Arms Index was invented in 1962 by Dick Arms. It has tracked market data since the late 1960's. Without going into great detail, the Arms index is simply another measure of fear, selling, and capitulation in the stock market. It uses relationships in the advance/decline line and other indicators. A reading above 1.50 is considered to be a signal of a significant bottom that will occur between 4 and 20 days following the signal. That signal was given Tuesday. It has accurately called bottoms in 1970, 1974, 1980, 1982, 1987, 1997, and . . . 2001? There is not data of the type necessary to back test the index earlier than the 1960's, so we don't know how it would have performed in the Great Depression. But, as we have said before, we are not in the Great Depression right now. Do we trust it? Well, we hope it is right, but we don't see all the indications of a turn we would like to see such as great patterns in great stocks. Still, a bottom means a bottom and not a massive rally. After the bottom there is some building that goes on to complete bases. Further, there could be more selling before the time period is up. All the more reason to keep an eye on price/volume action.
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