June 7, 20101

ADVISORY

RICHARD W. ARMS JR.

800 WAGON TRAIN DRIVE SE ALBUQUERQUE, NM 87123OFFICE (505) 293-4438 FAX (505) 298-2833

June 7, 2010

ARMS INDEX AN EXTREME…13.22

The value for the day on Friday was extremely high. According to the Wall StreetJournal it was 13.22. They used the following components: Advances 315, Declines2839, Advancing volume 13,602,600, Declining volume1,621,066,016. I have gone withthis since the numbers I got from other sources were obviously completely erroneous.Sometimes, as in 1987 particularly, there is a lot of confusion. But watching the numbersduring the day on Friday, I think the WSJ must be close.

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-1012345678910111213141516

SINGLE DAY AI

Moving Average (13.2200)5000100001500011

DOW INDUSTRIALS

DOW INDUSTRIALS (10,249.61, 9,881.11, 9,931.97, -323.311)

June 7, 20102

That makes this the fourth highest reading in at least the last seventy years, which is asfar as I can go back. On the chart above I have shown the daily readings going back to1987, with the horizontal blue line at 10.00 for reference. You will observe that theextremes such as we saw on Friday seem to come in at bottoms. They represent a suddenrush for the exits, such that the declining stocks are receiving ten or so times as muchvolume as the up stocks. In other words, the crowd mentality has taken over and stocksare being indiscriminately dumped. It is a sign of fear and panic, and appears, in mostcases, to be misplaced fear, at least on the short to intermediate term.Over the weekend I spent a good deal of time looking back at history, to see what thisreally means. In my years in this business I have seen a number of them, and they alwaysare greeted with huge consternation, especially on the Evening News. But there are timeswhen one has to go where the crowd is coming from, and immense daily Arms Indiceshave, in the past, been such times. Lets go back and take a look.First we have the day of September 9

1940. The reading was not over ten, it was 7.59,but it was the biggest number in my recorded history to that time, and it was immense inits context. The market had taken a huge drop earlier in the year, evidently in response to

1939 Jul Aug Sep Oct Nov Dec 1940 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1941 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1942 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1943 Mar Apr May Jun Jul Aug Sep Oct Nov Dec 19500100015002000250030003500400045005000550060009095100105110115120125130135140145150155160

SEPEMBER 9, 1940

DJIA3443 (135.890, 135.890, 135.890, -0.31000)

June 7, 20103

the complete subjugation of Continental Europe by the troops of Hitler and the Axisforces. But it was in a recovery from that drop, and seemed quite healthy before thesudden big slide and big AI number seemed to come out of nowhere. The news, as far asI can find (No I was not yet charting markets at that time!) was primarily that the Blitz of London began a few days earlier. But the day marked the exact bottom of a pullback,and led to substantial further advance over the next three months. The message seems tobe that the big AI day came out of nowhere, and was the end of a drop not the beginning.It was six years later that some more large numbers appeared. On February 19, 1946 thereading was 6.13, and then just a few days later on the 25

it was 8.51.Again, the big numbers seemed to come out of nowhere, were not on huge volume, andsoon led to further advance. True, they were not over ten, but they were, in context, verylarge. In this case, though, the subsequent move was small, and was replaced threemonths later with a bigger slide. Searching, with Google, for significant events at thattime, I can find none. It looked like just a hiccup within the long consolidation that led tothe 1950-1966 secular bull market. Did I miss something?

1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1500100015002000250030003500400045005000550060006500700075008000110120130140150160170180190200210220230240250260270280290300310320330340350360370380390400410420430440450460470480490500510

FEBRUARY 19, 1946 6.13FEBRUARY 25, 1946 8.51SEPEMBER 26, 195531.89

DJIA4455 (488.400, 488.400, 488.400, +3.84000)