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The Hindenburg Stock Market Omen Doomed to Crash and Burn?

Stock-Markets / Stock Markets 2010 Aug 22, 2010 - 01:01 AM GMT

By: Nadeem_Walayat

Stock-Markets

Best Financial Markets Analysis ArticleThe dreaded Hindenburg Omen (HO) has been making the rounds in the mainstream press and BlogosFear for the past few weeks, which purportedly heralds an imminent stock market crash.


Hindenburg Seller: Market Oracle Checks Out - Barrons - 21st August 2010

ES MIEKKA, A BLIND ORACLE credited as the author of the Hindenburg Omen, a predictor of stock-market crashes that has been getting a lot of buzz, sold his stock positions last week.

The Omen was triggered Aug. 12, when new 52-week highs and lows exceeded 2.5% of issues traded on the New York Stock Exchange, the 50-day moving average rose and three other factors confirmed a confused market. It happened again on Friday, he says.

Hindenburg Omen' Indicator Suggests Slump in Stocks: Technical Analysis - Bloomberg - 13th August 2010

This week’s plunge in U.S. stocks triggered a technical indicator known as the Hindenburg Omen that may signal a more severe sell off, according to analysts who follow charts to predict market moves.

Dr Doom on stock markets, the Hindenburg Omen and what next - FT - 31st July 2010

“Normally a single signal is not of great significance, but when several signals occur within a short period of time, the odds for a stock market crash increase”, says Faber.

As of Tuesday, July 23, the Hindenburg signal had fired at least eight times over the previous six weeks. The Hindenburg Omen is the alignment of several technical factors that measure the underlying condition of the stock market and warns of either impending market crashes or severe declines.

Do you notice that the HO is apparently more common than the theory suggests it should be? Which implies that it is overly complicated and highly subjective rather than technical as illustrated by Marc Faber's comments of several Hindenburg events in July.

What Exactly is the Hindenburg Omen Indicator?

The criteria for the Hindenberg stock market crash omen are -

1. The Number of NYSE 52 week New Highs and Lows are both greater than 69

2. New highs cannot be more than double the new lows

3. Rising 10 Week NYSE Index Moving average

4. A negative Mcclellan Oscillator on the same day.

That the HO should be repeated within 36 hours to confirm a signal, else it is an unconfirmed HO.

This month (August 2010) has seen three occurrences of the HO, first on the 12th (unconfirmed HO), then on the 19th and again on the Friday the 20th with 83 New highs and 95 New lows thus confirming the HO and signaling an imminent crash.

My View - If you have been following my analysis / commentary for any length of time then you will know that I consider all individual tools, indicators and theories as no more reliable on their own than a coin toss i.e. a 50/50 probability, and therefore it should be the job of the analyst to pull all the threads together towards a arriving at a probable final conclusion.

The problem I see with the Hindenberg Omen and its kind is that it is too easy to generate a back fitting indicator that perfectly calls every top or bottom in hindsight but going forward requires constant revisions to make the indicator fit onto future price action, which basically means you have a 50/50 chance (or less) of the indicator going forward producing the outcome that it purports to forecast, as each time it fails the indicator is changed to allow for the reason as to why it failed which basically means fewer and fewer occurrences which does NOT mean that it becomes more accurate rather more accurately fitting the data in hindsight.

To effectively use the HO, it must be part of broader unbiased analysis as the biggest mistake analysts make is by attaching near certainty of outcome to an indicator that then clouds their judgement at arriving at a more probable conclusion. So the HO is no better or worse then any other technical indicator and should be treated as such rather then to be elevated to a level that generates headlines of imminent stock market doom. Given the fact that the HO's are rare this to me suggests that it is pretty much worthless as it does not allow for the build up of experience of using the indicator along with all other analysis on an going basis. It is infinitely better for analysts or traders to train themselves to use simple trendlines than waste time on tracking once in a blue moon indicators such as the HO.

Also remember that stock market crashes are extremely rare and near impossible to forecast events as illustrated by the long history of failure, remember October 2009? That was supposed to have witnessed a repeat of Black Monday that NEVER happened. Whilst the May 6th Flash Crash was missed by ALL.

The facts are that the main proponents of the Hindenburg Omen have been WRONG throughout the WHOLE Bull market from its birth in March 2009 and subsequent 18 month trend, the perma-bears each month jump from indicator to indicator (In June and July the Head and Shoulders pattern was all the rage) all the while hoping all the past investment account busting wrong calls have been forgotten as they wait to eventually be right, even a broken clock is right twice a day.

Stock Market Trend

Last weekends quick stock market analysis (15 Aug 2010 - Central Bankers Stoking the Inflation Fires, Whilst Academic Economists Worry about Deflation ) concluded in expectations for the Dow to target a trend towards 10,100 for a possible low after failing to hold 10,700. This week the Dow closed down at 10,213, and put in a fresh low at 10,147. Considering the prevailing HO bearishness of the past 48 hours which could have limited negative impact on the market next week, the Dow could now trade down into the 10,000 to 10,100 zone. I am looking at the chart and its not showing anything other than remaining within a tight corrective trading range of between 10,700 and 10,000.

The risks to the scenario remains of a break below 10k to target 9,614 low a break of which would imply a larger ABC pattern that targets a downtrend into October (current scenario is that the early July marked the ABC correction low to target 10,700 then 11,250). So unless I see a breakout form the tight range, I still don't see the point of taking the time to do an in-depth analysis at this point.

Pakistan Floods Crisis Worsens

The floods crisis in Pakistan has now put 20% of the country under water with the number of people affected expanding to 20 million from 14 million. The growing risk is that from the outbreak of water bourne diseases such as cholera that could see the death toll multiple into the tens of thousands unless urgent action is taken. Looking beyond the floods, Pakistan's already war and recession weakened economy lies in tatters that risks political and social instability which could spill over into neighbouring countries.

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Comments and Source: http://www.marketoracle.co.uk/Article22092.html

By Nadeem Walayat

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Comments

Phillip
22 Aug 10, 11:57
Hindenburg Omen

Dear Nadeem,

And the HO has occurred ahead of ALL market crashes BUT, more importantly, the correlation is only 0.25. So, give me a break!!

However, this time it may be correct. I’m sick of TV pundits (aka stock salesmen) saying stocks are fairly priced based on OPERATING EARNINGS projections. S&P earnings for 2011 are about $72 on a GAAP, AS REPORTED basis, the correct measure. P/E’s normally bottom out in single digits in a secular bear market but, being charitable, let’s put a 10X print on that. Hmmm.

Still no signs of that inflation Mega-trend by the way? I guess we will all be correct eventually but my bet remains on deflation and my US Treasury investments are now up over 20% this year. How are equities doing?

Kind regards,

Philip


Shelby Moore (author of "Secure Websites Are All a Lie")
22 Aug 10, 14:17
Oh treasuries

Phillip,

I tried to tell CaseyResearch that in 2009, they told me that I was "intellectually uninteresting", that just because we have an inflation trend, it doesn't mean interest rates will rise. In fact, they won't rise until the hyper-inflation starts.

But you have to be crazy to hold on to treasuries, because when the hyper-inflation starts you will have no warning and you will lose everything, even your principle! My gold and silver are up roughly 60% including 2009 and they won't go "poof" when the hyper-inflation starts.


Nadeem_Walayat
22 Aug 10, 15:15
Inflation Mega-trend
Hi Phillip The UK Inflation mega-trend has been underway since January 2010. The trend is precisely in line with forecast.

UK Inflation May 2010

U.S. Treasury bonds are roughly where they were in March 2009, NO net gain. Though if you have a profit, don't forget to lock it in or you could see it rapidly disappear. Stocks are about 60% higher, and many commodities similarly significantly higher.
Christian
22 Aug 10, 17:30
stocks are not so bullish anymore

I believe there has historically been a 40% chance of a greater than 10% crash/panic within...4 month's of the HO.

AS far as a inflation mega trend....don't see it... at least on the monetary supply side....and CPI is not behaving anything different for the last ten years....in fact it trailing off again.

Treasury's should be good because GOVERNMENTS can't afford to let intrest rates RISE.....the debt overhand is to high....they will use what ever it takes to keep them low and they should be able to do kick this can down the road for at least another year...wouldn't you agree.

In the U.S economic indicators are flashing Recession and they will be unless another stimulus bill is enacted or the formulas are doctored.

and regarding stocks

the stealth bull market ...sure seems like it could be just a stealth bear big bounce...it's all about perception filters ...but minus increased bank lending and continued stimulus stock will go back down...deleverging from a credit bubble and a bull market don't jive together...this "bull" is dependent on a continued increase in stimulus. Do you not ponder this?


Phillip
22 Aug 10, 20:21
HO

Hi Nadeem

Still love your work and read all of it together with a lot of other inputs.

In my earlier mail I was talking about returns THIS YTD. I got out of equities and Corp Bonds early this year and put the proceeds into Treasuries. Everything made money in 2009 but since April I have been in Treasuries, Gold and Gold stocks to await US deflation. There ARE differences in the UK I readily concede, but I am a US-base (Not based but base) so my point of reference is the US. But I suspect the UK will follow. I see yields on the 10-year dropping towards 2% as the Bond market continues to project deflation and a Double-dip recession.

The Bond market usually gets it right (There is the joke about the equity market being the bond market's stupid little brother)

Anyways, you have been very consistent in your views and I think that is very good. In due course, I'll be the first to admit I was wrong!!


Nadeem_Walayat
22 Aug 10, 20:28
Inflation

Christian

40% chance of a 10% plunge during the next 4 months - Which covers just about any 4 month period during the past 10 years where you will have seen a 10%+ drop 40% of the time. There is no usable signal its all hype. Now if it said the stock market would crash monday 23rd August 2010 then it would have value, 40% chance of anytime during 4 months is worthless.

Inflation has remained above the Bank of Englands UPPER MAXIMUM limit of 3% for the whole year. According to the Bank of England the CPI should be below 2% by now (Feb 10).

if you read the likes of Prechter, Faber and others, this "bear bounce" should have died between August and October 2009.

TIPS is where you should have been for the past 12 months as that discounts INFLATION and LOW interest rates.

Inflation surprised the academics who were touting deflation for 2010, 2011 will see yet HIGHER inflation and PANIC interest rate rises.

Because where the Bank of England is concerned it has been in a state of panic for the past 3 years, repeatedly frozen into a state of paralysis that only acts when the government instructs them to as occured in October 2008.

UK Inflation is not going to comply with the bank of englands expectations to magically converge to 2% in 2 years time. This year its 3% to 4%, next year it will be 4% to 5%, year after than 5% to 6%.

What do you think will happen to interest rates and bond yield ?

The US should also see inflation rise as it will be a global phenomena


lee katz
26 Aug 10, 05:42
can you please do a market analysis in light of the recent market

Dear Nadeem,

I have been following your newsletter for some time now and think you do a great job.

I was hoping you could do a market analysis shortly as I am very worried about a market crash given the latest bad economic news over the last week.

Thanks and keep up the great work.

Lee


Nadeem_Walayat
26 Aug 10, 06:51
stock market crash

I don't see a stock market crash,

I see current price action as a buying op.

Best,


PN
26 Aug 10, 11:53
Stock market crash?

@Nadeem

Then what is your article talking "The Hindenburg Stock Market Omen Doomed to Crash and Burn?"???

Are you confused or trying to confuse others? Pls put a summary section in your article to summarize what you want to communicate, some people (like lee, me etc) get lost otherwise..



26 Aug 10, 13:52
short

You can see what you like,we all do,but it doesn;t make it any more likely to be 'right'. You're long and I am short.

See you on the otherside.


Paul
26 Aug 10, 16:45
buying op.

Trouble with "buying ops" in this kind of market is that there'll be even better ones tomorrow, and the day after that and so on...


Nadeem_Walayat
27 Aug 10, 03:56
bears

Your a bearish lot :)

PN - the article is clear, its a deconstruction of the hindenberg BS Omen, so you need to learn to read past the title.

Best.


Lewis
27 Aug 10, 13:14
?

Last weekends quick stock market analysis (15 Aug 2010 - Central Bankers Stoking the Inflation Fires, Whilst Academic Economists Worry about Deflation ) concluded in expectations for the Dow to target a trend towards 10,100 for a possible low after failing to hold 10,700. This week the Dow closed down at 10,213, and put in a fresh low at 10,147. Considering the prevailing HO bearishness of the past 48 hours which could have limited negative impact on the market next week, the Dow could now trade down into the 10,000 to 10,100 zone. I am looking at the chart and its not showing anything other than remaining within a tight corrective trading range of between 10,700 and 10,000.

The risks to the scenario remains of a break below 10k to target 9,614 low a break of which would imply a larger ABC pattern that targets a downtrend into October (current scenario is that the early July marked the ABC correction low to target 10,700 then 11,250). So unless I see a breakout form the tight range, I still don't see the point of taking the time to do an in-depth analysis at this point.

Seems straight forward to me??? As always thanks for the great articles much appreciated.


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