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The Only Market Crash Talk Worth Trading

Stock-Markets / Financial Crash Aug 16, 2013 - 03:35 PM GMT

By: Money_Morning

Stock-Markets

Keith Fitz-Gerald writes: You've no doubt heard the "crash talk" intensifying after two triple-digit down days. But after reviewing more than 100 commentaries, there are exactly two and a half I take seriously.

The one we'll start with can not only help you now - as in today. It can also give you a permanent edge, because most people will never know how it works.


That's a shame.

The indicator you're about to see has predicted every major market inflection point since 1985.

And that's why I need to show you its current "readings" while there's something you can do about it all. We'll look at four moves, in fact. Taking an initial stake in the shares below - or adding to your position - is just one of them...

First, here's the indicator that can give you as much as a 30-day "heads up"...

The "Hindenburg Omen," and Why We Take It Seriously

Named after the airship disaster of May 6, 1937, the Hindenburg Omen is about as doom-and-gloom as it gets. It's also esoteric, which leads a lot of people who don't understand it to pooh-pooh it.

That's a mistake.

The Hindenburg is one of the most insightful indicators out there, for two reasons:
1.) It's predicted every major market inflection point since 1985; and
2.) It's up to 90% accurate in predicting market selloffs resulting in at least a 5% correction within 30 days.

That sounds bad, but it doesn't have to be.

The Hindenburg is like a warning light on the dashboard in your car. In that sense, the real value is not that it's flashing... or even that it's lit.

What the Hindenburg is telling you is to prepare ahead of time or, for lack of a better description, to check under the hood before you have a problem.

There are very few stock market indicators that afford you the luxury of knowing what could happen before it does.

The other important thing to understand here is that 90% is not 100%. Despite the fact that the Hindenburg had triggered five readings in the last nine trading sessions as of Tuesday night, there are no guarantees the markets will crash - 10% is a lot of wiggle room.

Remember, the only sure things in life are death and taxes. Everything else is just a possibility.

Bernanke's meddling and trillions of dollars, for example, should have us living in a modern-day version of the Weimar Republic with 1,000% inflation or more. But we're not.

The Fed was guaranteed to fail, according to plenty of economists - yet it hasn't. I wish they'd dismantle it, but that's another issue.

Everybody "knew" Facebook was a slam-dunk IPO - only investors were the ones who got slammed.

That's why it's important to put things in perspective and view the Hindenburg for what it is: a dashboard warning light, albeit a very accurate one - especially since we've had back-to-back triple-digit declines this week.

So here's what to do when it flashes...

Reading the Hindenburg Omen

1.) It has correctly predicted a market crash up to 90% of the time.

2.) It picks up on something really weird going on in the markets. The "Omen" triggers when two things happen on the same trading day: 1) at least 2.8% of all 2,800+ securities listed on the NYSE hit a 52-week HIGH and 2) at least 2.8% hit a 52-week LOW. We just don't see that kind of extreme pricing action under "normal" market conditions. It suggests a lack of conviction that may spell trouble.

3.) It usually signifies a serious crash ahead - and soon. A confirmed Hindenburg Omen sets up at least a 77% likelihood of a move to the downside of 5% or more in the next 30 days.

4.) It's "flashed" 11 times in the past four months. First on April 5, again in May, three times in June, and six times (so far) in August. This clustering is extremely unusual. It happened just ahead of the 2000 and 2007 crashes.

Check the Market's "Oil"

It's hard to view the markets in isolation; there is no silver bullet. Therefore, the first thing I do when I get a reading from the Hindenburg is to check it against other trusted indicators.

Again, I'm not looking for absolute answers but, rather, relative information.

Right now, the markets are very long in the tooth, meaning the rally has run a long way without a substantial correction. How long may actually startle you.

We've been riding the bull for 54 months off of March 2009 lows. Since 1953, the average bull run has ended after 43 months, so you could easily argue that we're overdue for a correction. The very longest rallies have been 56 to 60 months, so we are coming close to record-setting territory.

That, in and of itself, makes me nervous because any time you start talking about extremes, you have to factor in the unthinkable. To me there's one way to spell that - B-E-R-N-A-N-K-E.

He and his financial boffins have meddled with these markets so long and so extensively that anything resembling normal market functions has gone by the wayside.

They keep pumping money into a system that was destroyed by too much money in the first place. They might as well yell last call in a room full of bar-flies on the assumption that doing so will help them stop drinking.

Which brings me to the remaining one-half piece of worthwhile "crash talk"...

It's Time to Make a Decision

Structurally, the economy is a disaster. Earnings are slowing, breadth is not what it should be for a real recovery, and the jobs situation is still several million people in the hole.

Normally, these things would kill a financial market. But right now, the meme is that "bad is good"... as in, good enough for more stimulus. Days like today (Wednesday) with the Dow off triple digits make me question how long the Fed can continue pulling rabbits out of the proverbial hat, but that's really another question entirely.

What we have to do right now is decide whether to play ball or not.

I say, play ball.

So here's what to do...

1.) "Don't fight the fed" is now "don't fight the feds" - plural; every central banker around the world is in on it. As long as they don't pitch a taper tantrum, odds favor yet more upside, as hard as that is to believe. So we want to be along for the ride with the best "glocal" companies we can find. Very shortly, we'll begin transitioning to "global challengers" to keep up with Bernanke's successor and as a means of hedging our bets. I don't know about you, but I'd rather place my eggs in a basket overseen by experienced, savvy C-Level executives than a bunch of politicians who haven't got a clue how real money works.

2.) We're already taking profits and tightening up our trailing stops. This ensures that we are along for the ride, while also protecting us against the possibility of a market pause or something more serious if it develops.

3.) We're confining new purchases to companies still involved in unstoppable growth and backed by trillions of dollars in upcoming spending. It's important to remember that markets come and go but companies can continue to grow through it all. Many corrections occur with no changes whatsoever in the underlying business fundamentals, which means the best companies - our recommendations - are put on "sale." I know that's hard to stomach, but ask yourself this if you can't get past the notion... would you rather go to your favorite store and pay too much or pick up something after it's been put out at a discount?

4.) Over the past few months I've been following other indicators as the markets have risen and recommending that we add to holdings like the RYURX, GLD, and RCS among others. These are all important stabilizers that have historically risen even as other assets have fallen. This means we can afford the luxury of riding out a correction calmly, logically, and with an eye to the future. Studies show that as little as 3-5% of overall assets invested in these sorts of things can preserve income, too which is vitally important to our financial success.

What to Watch Now

I'm following 10-Year Treasuries closely. Yields shot up to 2.821% - a two-year high - which suggests that the Fed is losing control over interest rates.

If there is no support for bonds in the months ahead, you can bet the nearly $500 trillion global interest rate derivatives market will reset... and that really will cause a crash.

Stay tuned...

Source :http://moneymorning.com/2013/08/16/the-only-crash-talk-worth-trading/

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