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Weekend Stock Market Analysis

(8/14/10)

For those that follow the Hindenburg Omen or have never heard of it there was an unconfirmed signal on Thursday.   In order for it to be confirmed we will need to see at least more signal within the next 35 days.   A basic definition of the Hindenburg Omen is as follows:

1. 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 2.2% of the total issues traded that day.
3. That the NYSE 10 Week moving average is rising.
4. That the McClellan Oscillator is negative on the 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). 

A confirmed Hindenburg Omen occurs if a second signal occurs during a 36 day period from the first signal.  The charts below will show all of the Hindenburg Signals going back to the mid 1960's.   

The first chart is from the mid 1960's through the mid 1970's.  I have marked all confirmed Hindenburg Omens (2 or more signals) with the letter "C".   As you can see all decent sell offs (points A to B) were accompanied by at least one Hindenburg Omen Signal.

The next chart shows the period from the mid 1970's through the late 1980's.   Once again I have marked all confirmed Hindenburg Omens (2 or more signals) with the letter "C".   Notice the late 1987 crash (points A to B) was accompanied by a confirmed Hindenburg Omen.

The next chart shows the period from the late 1980's through the late 1990's.   Once again I have marked all confirmed Hindenburg Omens (2 or more signals) with the letter "C".   As you can see the 2 confirmed Hindenburg Omens in 1995 and 1998 were not accompanied by any type of sell off as the the market continued higher (points A to B).

Meanwhile the last chart is from the late 1990's through 2010 with the same labeling as before.   As you can see prior to the top made in early 2000 there were "3" separate confirmed Hindenburg Omens while in 2007 there were "2" confirmed Hindenburg Omens as both were followed by substantial sell offs (points A to B).    

Finally just a few things to keep in mind.  Not all Hindenburg Omen signals mean a big drop is coming, however, as the charts show above every significant sell off since the mid 1960's has been accompanied by a Hindenburg Omen signal.  Thus it is a warning sign that investors shouldn't be complacent and be overly aggressive in taking positions to the long side in the market.   Meanwhile if we see additional signals occur the next 3 to 4 weeks that would increase the odds of a decent correction developing in the Fall which has been a weak period for the market historically. 

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