Sellers showing signs of panic on the NYSE, but that’s not necessarily a buy signal

Sellers on the New York Stock Exchange (NYSE) are exhibiting panic-like behavior, according to the Arms Index, which is a volume-weighted breadth measure. The Arms (or TRIN) tends to rise above 1.000 when the stock market falls, as the ratio of declining volume to advancing volume exceeds the ratio of the number of declining stocks to the number advancing stocks. With the Dow Jones Industrial Average DJIA, -1.54% dropping 576 points, or 1.9%, and the S&P 500 SPX, -2.12% sinking 2.5% in morning trading, the NYSE Arms rose to 2.558, as decliners outnumbered advancers by 16.1 to 1, while declining volume topped up volume by 41.3 to 1. Many on Wall Street interpret a reading of 2.000 as a sign of panic selling, which some view as a contrarian bullish signal, since it suggests capitulation. But the last time the NYSE Arms closed above 2.000 was when the Dow dropped 107.1 points on Sept. 22, and the Dow fell 486 points the next day. Before that, the Arms closed above 2.7988 on Sept. 13 when the Dow slid 1,276 points, but the Dow rose just 30 points the next day before starting a six-day losing streak in which it tumbled 1,885 points. Meanwhile, the Nasdaq Composite COMP, -2.93% shed 3.4%, but the Nasdaq Arms rose to just 1.109.