Monday, March 13, 2006

TRIN and Market Efficiency

This will kick off a historical look at the TRIN (Arms Index). Today we had a gain of .19% in SPY and TRIN was .75. I went back to March, 2003 (N = 761) and looked at all one-day occasions in which TRIN was between .70 and .80 (N = 87). What we find by making TRIN the independent variable is that such a TRIN value can be associated with very different market outcomes. For example, in the sample, the one-day SPY readings associated with TRIN between .70 and .80 range from a loss of -.15% to a gain of 2.13%. The gain of .19% on Monday was definitely on the lower end of the spectrum. It's saying that, although volume was relatively concentrated in advancing stocks, such concentration could not generate much upside in the large cap market.

I divided the sample in half based on the SPY outcomes to see what happened the next day. When TRIN was between .70 and .80 and SPY was weak, the next day in SPY averaged a gain of .01% (21 up, 22 down). This was weaker than the average rise of .06% for the full sample. When TRIN was in the same range and SPY was strong, the next day in SPY averaged a gain of .08% (25 up, 19 down). It thus appears that when the market is relatively inefficient--a concentration of volume cannot generate much price gain--short run outcomes are weaker than if we see volume concentration associated with price strength.

I'll be investigating this idea of market efficiency further. For now, we'll count this one very modestly in the bear's column.


John Wheatcroft said...

Have you ever tried using a two moving average method - eg. delta(SMA(5), SMA(20)) and attempted to use that as a primary indicator? The ma's would be of the TRIN. I think you might be interested in what happens at the max of the excursion.

Brett Steenbarger, Ph.D. said...

Great idea, John. I will be playing with a few methods, and yours sounds as though it might be promising for longer swing moves. It might be effective for the VIX as well--