Arms Index Hints at a Retest

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Just about two weeks ago, we had a TRIN reading over 10. I must confess the TRIN, or the Arms Index, is the purview of RealMoney's own Dick Arms and not an indicator I usually monitor. However, having recalled that 21 years ago during the crash of 1987 the TRIN was also in double-digit land, I scouted around to see if there were other times it had been this extreme.

Apparently this is a very rare event. There have only been five occurrences prior to Dec. 1 of this year.

The first time was in September 1955. I don't have a chart of the S&P (or the Dow ) to show from then, but I can tell you from Richard Russell's invaluable annual charts that the DJIA was at 487 in mid-September -- the high of the year -- and started plunging when President Eisenhower had a heart attack. It fell to 438 in a matter of two weeks. At about the end of the first week, when we were halfway through the decline, the TRIN had a reading over 10. There was a successful test in mid-October 1955.

The next time was during the aforementioned crash of 1987. On Oct. 19 and again one week later on Oct. 26, we had TRIN readings over 10. (See the red boxes on the chart below.) Notice that the successful test was not until Dec. 4, 1987. (See the blue box on the chart below.)

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The next time was in October 1997. To offer some background, I know most folks call 1998 the Asian crisis, but I lived in Singapore in 1997, and I can tell you that the Asian crisis began that summer -- specifically, in July. That's when Thailand devalued the baht, which was followed by devaluations throughout the rest of Asia. So the crisis actually began in the summer of 1997.

Note on the chart below that the red box represents the TRIN reading over 10, while the blue box represents the retest.

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The next TRIN reading over 10 occurred Feb. 27, 2007. Some readers might recall that is what I often refer to as the February "crashette." If memory serves me correctly, that was the beginning of the end for the mortgage mess, because that was when we first began to see publicly that the Bear Stearns hedge funds were in trouble (feels like ages ago, eh?). Notice once again the high TRIN reading (see the red box on the chart below) was not the low; the blue box (also on the chart below) was the retest a few weeks later, in mid-March.

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This brings me to the current environment. You might be surprised, as I was, to find that the over-10 TRIN reading did not occur Nov. 20, but rather Dec. 1 (see the red box on the chart below). If history is any guide, that means we ought to be setting up for some sort of retest.

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Keep in mind that in 1955 and 2007, the retests were lower lows, and in 1987 and 1997, they were higher lows. So I can't say how this one might turn out, since it's a 50-50 proposition at this point.

Of course, I'd want my indicators to line up -- and the market to get oversold again (please see my other column this morning for more on that) -- but in the past, this sort of extreme TRIN reading has led to a successful test several weeks later. So I thought that was noteworthy enough to bring to your attention.

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Helene Meisler writes a daily technical analysis column and TheStreet.com Top Stocks. For more information, click here. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback; click here to send her an email.