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Tuesday, August 13, 2013

Amazing Cluster of Hindenburg Omens

Remember the Hindenburg Omen?  For the 5th time in the last seven trading days, 5 times since last Monday, the sign has appeared.  The omen is a set of market technical indicators which precede many (but not all) market collapses.  To borrow a concise description from ZeroHedge:
As a reminder, the 5 criteria of the Omen are as follows:
  1. That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.
  2. That the smaller of these numbers is greater than or equal to 69
    (68.772 is 2.2% of 3126). This is not a rule but more like a checksum.
    This condition is a function of the 2.2% of the total issues.
  3. That the NYSE 10 Week moving average is rising.
  4. That the McClellan Oscillator is negative on that same day.
  5. That new 52 Week Highs cannot be more than twice the new 52 Week
    Lows (however it is fine for new 52 Week Lows to be more than double new
    52 Week Highs). This condition is absolutely mandatory.
Tyler notes:
For the 5th time in the last 7 days, equity market internals have triggered an anxiety-implying Hindenburg Omen. Based on our data, this is the most concentrated cluster of new highs, new lows, advancing/declining based confusion on record.  The last few occurrences have not ended well (though obviously not disastrously) but as the creator of the 'Omen' notes, the more occurrences that cluster, the stronger the signal.
and
We have seen clusters before... (but not on this scale)...
StockTiming, the little freebie market newsletter I get, has been pointing out the subtle changes in the market over the course of the last month or so.   Look at the bottom half of this chart, which shows the institutional buying and selling action.  These large companies essentially set the direction of money flow into/out of the market and that means they set the overall direction of the market.  Since early July, they haven't increased their buying as they cut their selling.  See how selling (red) drops off - selling dries up from mid-June to the end of July - and buying (blue) was level through much of the sell-off and then started dropping off. 
The big institutions know that they set the direction of the market and if they sell off too fast, they can start a panic.  Remember the announcement back in mid June that the Fed may start "tapering" (shutting down) their money pump?  That's the massive spike in selling in June - but it was preceded by a downturn in buying and increase in selling (reacting to a rumor?).  After that nervousness, they seem to have adopted a "don't make waves" policy.  They aren't selling off too much, but they sure aren't buying either.  I see that as they're limiting their potential losses.  Notice how the NYA index (top curve) has been trading pretty much sideways since about July 15th? 

The analogy I see is unwinding; slowly discharging the battery.  Just waiting on the next money dump from the Bernank? 
How big a correction are we likely to see?  And exactly when?  Opinions vary, but a 5 to 10% drop in the markets seems to be what they're saying.  When?  Funny how so many market crashes have happened in September.  Which means essentially in 2-4 weeks? 


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4 comments:

  1. GrogAugust 13, 2013 at 10:50 PM

    It could be a 10% to 20% drop, I also read ZH, one of the primers will be Bank of Japan, if they continue to tank the dominos won't stay up for long.

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  2. MattAugust 13, 2013 at 11:57 PM

    I'm also hearing the "20%" word over on Fox Business News. They are mentioning it as the "big correction" rather than a collapse, but the ones mentioning it have that "look" when they say it. They know what's about to happen.

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  3. AnonymousAugust 14, 2013 at 12:31 AM

    Personally, I believe technicals (charting) to be absolute BS, valuable only to the extent that others believe in such.

    But YMMV. Do you follow this for actual investing, and if so what are the results?

    itor

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    Replies
    1. SiGraybeardAugust 14, 2013 at 8:02 PM

      The way I usually describe technical analysts is "guys who draw lines and curves on graphs and (here's the big part) think those lines actually mean something". Anyone can draw any lines they want on any stock price or market measurement. It takes real ego to think your lines mean something special.

      Some of the patterns are so obvious as to be giveaways. When a pennant or flag pattern occurs (a converging triangle); of course the thing has to break out of the triangle. The triangle ends at the point while the series being plotting has days beyond that point. Others, like a head and shoulders pattern or a Fibonacci limit, seem really important and good indicators but only become obvious after they've happened. I've seen many patterns called as head and shoulders that never turned out to be that.

      I think the real utility of it is that we know the companies that do this for a living all employ technical analysis, so if a majority is drawing a conclusion a specific thing is going to happen, playing to that knowledge has to help you.

      In that case, maybe a better description for technical analysis is "self-fulfilling prophecy".

      The short answer to the second question is yes, but I don't do a lot of investing and I don't think my results have been anything to brag about.

      Delete