In the last few weeks, Wall Street has been spooked by a technical occurrence know as the Hindenburg Omen. The basis for the concern is we have recently seen both relatively high numbers of new 52-week highs and new 52-week lows. Wikipedia has a good summary of the Hindenburg Omen calculations.
The recent triggering of the omen is concerning and aligns well with our models in that it is indicative of a weak stock market. However, comments and data about the omen seem to do a good job covering the "bad" outcomes after the omen was triggered, but give little performance data for stocks when "good" outcomes occurred following a Hindenburg sighting.
In a very well researched article on the Hindenburg Omen by Robert McHugh, he states the following:
There is a 30 percent probability that a stock market crash — the big one — will occur after we get a confirmed (more than one in a cluster) Hindenburg Omen. There is a 40.8 percent probability that at least a panic sell-off will occur. 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.
McHugh does a good job covering the "bad" above. Here is the same data presented from the "good" perspective:
There is a 70 percent probability that a stock market crash — the big one — will NOT occur after we get a confirmed (more than one in a cluster) Hindenburg Omen. There is a 59.2 percent probability that at least a panic sell-off will NOT occur. There is a 44.4 percent probability that a sharp decline greater than 8.0% will NOT occur, and there is a 22.2 percent probability that a stock market decline of at least 5 percent will NOT occur.
The first Hindenburg trigger came on August 12, 2010 when the S&P 500 closed at 1,083,61. Since then stocks have already dropped 4.04% using yesterday's intraday low of 1,039,83. Therefore, some pressure on the markets has already been relieved from a basic technical perspective.
A balanced view of both the "bad" and "good" outcomes was presented by Mark Hulbert in How Bearish is the Hindenburg Omen? Below are some excerpts:
That’s the urgent warning coming from devotees of an esoteric market timing gauge known as the Hindenburg Omen. They say that it is a reliable indicator of an imminent stock market crash. But I’m not so sure. In fact, my review of the data suggests that those using the Omen to predict a crash are good candidates to win the Chicken Little award"¦Upon closer scrutiny, the Omen’s triggering earlier this month turns out to be not very scary at all.
At CCM, our models flashed some warning signals on August 11, 2010 as described in the post Odds of a Multi-Week Correction Have Increased. Like the followers of the Hindenburg Omen, we have been and continue to be concerned about the current market environment. We believe the markets need to be monitored very closely in the coming days and weeks.
Taking into account the S&P 500's recent slide from 1,129, from a historical standpoint (1980-2010), the markets risk-reward profile is indicating some patience is now in order. We respect the risk-reward profile could deteriorate from current levels, but at present it favors bullish outcomes over bearish outcomes. The markets have been and remain fragile, so our bullish bias here is tentative and subject to change if the CCM BMSI drops below -165 (see table below). The August 25th BMSI level was 278 leaving us with a positive bias for the time being.
According to the Wall Street Journal, significant stock market declines have followed Hindenburg Omens only 25% of the time. Said another way, 75% of the time significant stock market declines did NOT follow a triggering of the Hindenburg Omen. There are plenty of technical and fundamental reasons to be concerned in the current environment, but the Hindenburg Omen seems to be getting a little too much hype relative to the statistical realities associated with it.
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Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC (CCM). CCM would like to thank StockCharts.com for helping Short Takes create great looking charts.Terms of Use. This article contains the current opinions of the author but not necessarily those of CCM. The opinions are subject to change without notice. This article is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. The charts and comments are not recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations are not predictive of any future market action rather they only demonstrate the opinion of the author as to a range of possibilities going forward. All material presented herein is believed to be reliable but we cannot attest to its accuracy. The information contained herein (including historical prices or values) has been obtained from sources that Ciovacco Capital Management (CCM) considers to be reliable; however, CCM makes no representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change and readers are urged to check with tax and investment advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Short Takes is proudly powered by WordPress . Entries (RSS)
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