The Arms Index, also known as the TRIN (TRading INdex), is a market breadth and strength indicator for the investor. It was created in 1967 by Richard Arms and is one of the most popular and valued methods of technical stock market analysis in the world. It is often used to get an insightful short-term technical analysis of the stock market. The Arms Index is published daily in The Wall Street Journal and is listed on almost every quotation system, as ARM or TRIN. It is an effective and key tool in ascertaining the momentum of the stock market over varying amounts of time.
The Arms Index is generally calculated using information from the NASDAQ or NYSE, but is also sometimes compiled from the S&P 500 or NASDAQ 100. It is calculated with the following formula: (advancing issues/declining issues)/(advancing volume/declining volume). Advancing issues are stocks that have risen in value, whereas declining issues are stocks that have declined in value. Advancing volume is all the volume of the stock market taken up by stocks that have risen in value, whereas declining volume is all the volume of the stock market taken up by stocks that have declined in value.
In the stock market, bear is used to describe a weak market and bull is the term used for a strong market. A result of one or higher using the above formula indicates a bearish trend, which means that the declining stocks are receiving more than their share of the volume of the stock market. A result of less than one indicates a bullish trend, which means that the advancing stocks are receiving more than their share of the volume of the stock market.
The Arms Index measures whether stocks that are rising in value are receiving a large or small share of the volume of the stock market as a whole. It tends to move inverse to the market, in the sense that a good day tends to push the Arms Index lower, whereas a bad day tends to push the Arms Index higher. The nature of the formula is such that a result above one indicates declining value stocks are taking up more volume in the stock market than increasing value stocks, and a result under one indicates the opposite.
The Arms Index is often used to analyze internal and sometimes hidden pressures and dynamics of the market. For example, many more stocks may be up than down in the stock market, and this would suggest the market is bullish because the majority of the stocks are rising. Analysis with the Arms Index may reveal that the market is actually impinged because these high stocks are not taking up their appropriate amount of volume in the market. Thus, through its use, an apparently bullish market may be revealed to be bearish, and vice versa.