After 30+ years in the financial markets, MoneyShow's Tom Aspray has come to rely on certain tools to help him identify key turning points, and this has been one of his go-to indicators.
The selling on Monday, February 3, started overseas as the Spyder Trust (SPY) opened lower and continued to drop throughout the day settling at $174.17, which was 2.2% below the prior Friday's close.
The range in the futures reflected even more violent selling as they opened Sunday night at 1777.50 and hit a low of 1732.25. The intra-day range was a whopping 51.5 points as the liquidation was relentless. There had been a similar sharp drop on January 24 as the decline in the emerging markets currencies triggered an initial wave of selling.
On that Friday, the S&P futures lost 33.7 points and made a short-term low early the following day as the futures stabilized for the four days. Those who established short positions as prices moved sideways were rewarded by the plunge on February 3, but how many on the short side took profits that day?
I am sure some did but many instead were expecting stocks to plunge further throughout the week possibly doubling their already sizable profits. They were likely dismayed when the SPY actually closed the week higher. Those who were still holding short positions likely had a sick feeling in the pit of their stomach.
Many years ago when I was a more active trader on both the long and short side of the market, I experienced this feeling and it was not fun. There was one indicator that I began to rely on to help tell me when the selling had reached panic levels. It was the Arms Index developed in 1967 by Richard Arms. It is now known by many as the Trin. The formula is pretty straightforward.