Subject: Do We Have a Hindenburg Omen? McHugh's Expanded Weekend Market Newsletter, August 20th
Dear Subscribers,
The latest Expanded Weekend Market Newsletter, issue no. 1398, August 20th, 2010, is now available at
www.technicalindicatorindex.com To access this report, simply log in and click on the Weekend button.
For those of you with busy schedules, here is an executive summary:
Did we get a confirming Hindenburg Omen Friday, August 20th? Yes. We now have a confirmed "official" Hindenburg Omen Stock Market Crash Warning signal. Friday, August 20th, 2010 saw a clear-cut, no-doubt-about-it H.O. observation, unlike Thursday, August 19th's more controversial "rounded" observation. Friday's signal confirms last Thursday, August 12th's first observation, so we now have at least two, a cluster, and are now on the clock of the far greater than normal possibility of a economy-rattling stock market crash starting sometime over the next four months.
Here are the details on Friday's observation: There were 83 NYSE New 52 Week Highs, and 95 NYSE New 52 Week Lows according to the Wall Street Journal, the lower of the two coming in at 2.64 percent, above the 2.2 percent threshold required for a Hindenburg Omen observation. Total NYSE issues traded were 3,143. New Highs were not more than twice New Lows, the McClellan Oscillator was negative at negative -106.46, and the 10 Week Moving Average is rising.
Last Thursday, August 12th, 2010's observation had the following characteristics: There were 92 New NYSE Highs, 81 New 52 Week Lows, the lower of the two coming in at 2.55 percent. New Highs were not more than twice New Lows. Total issues traded were 3,168. The McClellan Oscillator was negative, at negative -120.03, and the 10 Week Moving Average was rising.
Thursday, August 19th qualified as a "rounded" H.O. observation, meeting all requirements except the lower of the New Highs and New Lows came in at 2.18 percent, missing the 2.20 percent threshold by one New Low, but rounded to 2.2 percent, so was an observation with an asterisk.
But no matter how you care to interpret August 19th's observation, we have what we need for an official cluster with August 12th's and August 20th's. So what can we expect from here?
We can rely upon the probability distribution table from past Hindenburg Omen events using all five conditions, and using Wall Street Journal data, to assess what is likely to occur over the next four months. Stated differently, the probability of the stock market failing to drop significantly after an "official" Hindenburg Omen becomes very low, and the probability of the stock market declining significantly after an "official" Hindenburg Omen becomes high.
But worse for markets, the probability of getting a stock market crash starting sometime over the next four months - now that we have an "official" Hindenburg Omen - is far greater than normal, far higher than random, meaning prudent investors need to take action to prepare for the possibility of a stock market crash. On any given random day, the odds of getting a stock market crash are less than one-tenth of one percent. However, the odds of getting a stock market crash over the next four months have now risen to 30 percent. This is a huge increase in odds.
Our research notes that plunges can occur as soon as the next day, or as far into the future as four months. In either case, the warning is useful. It just means, if you want to play the short side after a confirmed signal, or move out of harms way, you must be prepared to see it happen as soon as the next day, or four months from now, possibly after you forgot about it. About half occurred within 41 days.
If we define a crash as a 15% decline, as stated, there is a 30 percent chance we will see a stock market crash before year end. Further, there is a 40.8 percent probability that at least a panic sell-off will occur, a decline greater than 10 percent. There is a 55.6 percent probability that a sharp decline greater than 8.0 % will occur, and there is a 77.8 percent probability that a stock market decline of at least 5 percent will occur. Only one out of roughly 13 times will this signal fail.
Here is an important point, and should be considered when you hear folks suggest the Hindenburg Omen is overblown: There has not been a stock market crash over the past 25 years without a Hindenburg Omen being on the clock. That is truly remarkable when you think about it.
It was on the clock just before the stock market crash of the autumn of 2008. It was present and accounted for a few weeks before the stock market crash of 1987, was there three trading days before the mini crash panic of October 1989, showed up at the start of the 1990 recession, warned about trouble a few weeks prior to the L.T.C.M and Asian crises of 1998, announced that all was not right with the world after Y2K, telling us early 2000 was going to see a precipitous decline. The Hindenburg Omen gave us a three month heads-up on 9/11 (2001), and told us we would see panic selling into an October 2002 low, warned in October 2007 that a multi-month 16 percent plunge was about to start, from the DJIA's all-time high. And it was on the clock three months before the stock market crash of the autumn 2008 into spring 2009 that wiped out 47.3 percent of the stock market's value. Our subscribers at
www.technicalindicatorindex.com were informed immediately as these signals were generated.
Another observation to keep in mind as we move toward the autumn is that once you get two solid Hindenburg Omens in a cluster, the probability of a severe decline does not seem to increase as more Omens occur within the cluster. Sometimes a two signal cluster produced a worse decline than a 5, 11, or 17 signal cluster. But what can be said about multiple signal clusters is that the warnings are being given further out in time, keeping us on the alert. More signals also assure us a greater likelihood of better quality signals, which seems to matter. Multiple signals are telling us things are not getting better, that something continues to remain wrong with the market.
What does it mean for traders and investors when we get a confirmed Hindenburg Omen? This is really important to understand. A confirmed Hindenburg Omen is not a guarantee of a stock market crash. The odds of a crash based upon the history since 1985 is 29.7 percent. That means the odds we will not have a crash are quite high, at 70.3 percent. However, since a stock market crash is akin to economic death in many circles, you can look at the situation like this. If you were hearing from your doctor that the surgery you are contemplating stands a 30 percent chance of you dying, that becomes a very high percentage probability - one you likely do not want to take if the surgery is not absolutely necessary. A 30 percent probability of a stock market crash is extremely high when you consider that there have been only eight over the past twenty-five years, and the normal odds of a crash happening randomly are only about one-tenth of one percent. You now also have to factor that the Fed is pumping liquidity to prevent crashes once these signals occur. So you do not want to go short the farm. You may want to think about taking prudent precautionary action according to your investment advisor given the much higher-than-normal odds of a crash. That may not mean shorting. It may mean increasing cash positions or hitting the sidelines for a while. Or it may mean a carefully constructed shorting strategy developed with your advisor that limits losses, and invests only the amount which you can afford to lose. Still, it is interesting that even with the heavy liquidity the Fed has been pumping around the time of the past two signals, the odds of a 5 percent decline or more remain pretty high at 77.8 percent.
Short-term, Thursday's decline was the start of wave {3} down, wave {i} down of {3} down. That decline continued Friday. As wave {3} down takes aim on its down side targets of 1,010ish in the S&P 500 and 9,700ish in the Industrials, prices could see surprising acceleration to the downside.
We believe wave 3-down has started, which should be a dramatic sell-off. We expect stock markets could lose 20 percent from here. That downside target comes from Head & Shoulders top patterns from November 2009, as well as the proportional decline the Elliott Wave labelings suggest is possible. Prices will not likely drop straight down, but will consist of many corrective rallies, some of which could be strong, but at the end of the day, stocks should be much lower several months from now. We would not be surprised by a stock market crash event some time during this wave 3 drop.
The Industrials fell 57.59 points, closing at 10,213.62. NYSE volume fell to 99 percent of its 10 day average on the decline, which is Bearish. Downside volume led at 71 percent, with declining issues at 58 percent, with downside points at 55 percent. S&P 500 Demand Power fell 4 points to 368, while Supply Pressure rose 1 point to 382, telling us Friday's move was weak, with a lack of buyers allowing weak supply to push prices down. The Supply Pressure Indicator rose above the Demand Power Indicator Friday, August 20th, triggering an "Enter Short" positions signal. New NYSE 52 Week Highs fell to 83, with New Lows rising to 95 Friday, generating a confirmed "official" Hindenburg Omen, the second clean observation since August 12th, 2010's first observation.
The McClellan Oscillator fell to negative -106.46. The Summation Index fell to positive + 2,875.14.
We present the next two phi mate turn dates in this weekend's report, along with commentary on how this could play out. The Industrials rose 10.6 percent from our last phi mate turn date, July 2nd, 2010.
The NASDAQ 100 rose 2.75 points Friday, closing at 1,825.75. The Russell 2000 fell 0.18 points, closing at 610.78 Friday. The HUI fell 2.82 points to 468.37 Friday. September Gold fell to 1,227.2; Silver fell to 17.99, while October Oil fell to 73.82. The U.S. Dollar rose 0.61 points to 83.05. Bonds fell 11 ticks to 134^00. The VIX fell 0.95 to 25.49.
Best regards,
Robert McHugh, Ph.D.
Enviado: 26/8/2010 10:56
