The ARMS Index – In Memoriam?
My friend and technical analyst Richard (Dick) W. Arms Jr. (January 12, 1935 – March 10, 2018) passed away peacefully last week. We pay our respects this week by looking at a few indicators that Dick created in a celebration of his life’s contribution to technical market analysis. The following is an excerpt (italics) from my friend Jonathan Arter’s memorial of Dick.
Many of you will recognize Dick by the name of the famous stock market indicator that bears his name – The Arms Index. It goes across the tape as ARMS and was originally known as TRIN, an acronym for Trading Index. It is a volume adjusted advance/decline indicator that Dick created and originally wrote up for an article in Barrons in 1968. From there, his work in Technical Analysis continued to focus on volume aspects of the study.
ARMS Index = (The number of advancing stocks/The number of declining stocks)/(The composite volume of advancing stocks/The composite volume of declining stocks). An Arms index value above 1.00 is bearish, a value below 1.00 is bullish and a value of 1.00 indicates a balanced market. The farther away from 1.00 that a value is, the greater the contrast in force between buying and selling on that day. A value that that exceeds 3.00 is considered to indicate an oversold market and that bearish sentiment is too dramatic. A value that dips below 0.50 is considered to indicate an overbought market and that bullish sentiment is overheating.
The ARMS index was one of the first technical indicators I used in the early 1990s when I was trading the first ETFs (Index Participation Units).
Dick was always looking to improve technique and his Equivolume charting method cleverly combined the volume data directly into the posting of the high, low, and close price statistics. Chart making and the reading of the historical data is a visual craft and Dick saw ways of incorporating more information into a single entry. I really enjoyed it. I first picked up one of his books when I was twelve years old. I have always believed that markets are cyclical – – most of the time and – – always, eventually. Dick’s volume cycle work intrigued me and led me to meet my second career mentor – – Ian Notley – – whose work on global capital markets and cycles you well know. There is an old expression on the Street that “volume is validation”, the notion being that increased volume together with a price move (in either direction) is a confirmation of the importance of the price move. The price gives information about direction; and volume speaks to power, potential persistency and duration. Beyond Dick’s career lifetime fascination with markets was his love of literature and poetry. Dick attended Brown University and studied geology but his real passion was reading and writing. He had an immensely invigorating mind. He was a Mensa member. Whenever we got together we challenged ourselves to recite poetry from memory and enjoyed many good laughs. I will always remember that part of him as much as I will the analyst part. Dick called me the weekend before his surgery to replace a heart valve and asked me to come out to Albuquerque to visit once he had recovered. He wanted to see a friend. He was always the optimist. Even Dick’s “geese were swans”, as the expression goes – ever positive was he.
We can get a much better visual interpretation from equivolume charts. It appears we are seeing slightly more volume on the down days than we are on the up days on the recent rallies. That suggests that it will not be easy for this market to move much higher for now.
Our upcoming seminar series is underway. This week we will be in Montreal and Ottawa. Come out to one of the events and learn about what ETFs can help your portfolio with the uncertain economic backdrop over the next few years. Register free by clicking here. We ask BNN Viewers to make a voluntary charity donation to support Alzheimer’s research at Baycrest Hospital or Cancer research at the Hospital for Sick Children.