Rudolph was well into bringing the "Santa Rally" to town when this week he suddenly ran into the ominous sounding "Hindenburg Omen." Beyond that, economic news was mostly positive while markets remain overbought, breadth is dwindling and upward momentum has stalled heading into the lightly traded Christmas week.
Looking at My Screens
As I mentioned, momentum is dwindling as the indexes stall near highs for the year. Bullish sentiment remains at high extremes typically associated with market tops and preceding significant declines.
Also, last week markets generated a confirmed "Hindenburg Omen" that is a farily reliable forecaster for impending markets declines.
There are lots of good articles about the Hindenburg Omen but the salient facts from wikipedia.org are these:
- There is a more than 75% probability of a decline of 5% or more after a confirmed Hindenburg Omen.
- Larger selloffs have occured roughly 40% of the time after an omen while the probability of a major crash is approximately 25%
- A Hindenburg Omen has been generated before every major stock market decline since 1985.
- Over the past 25 years, it has a greater than 90% accuracy rate.
While I'm not a follower of the Hindenburg Omen and don't base trading decisions upon its occurances, I believe its statistical performance merits attention, particularly when combined with other technical indicators currently flashing caution.
Interestingly, the last Hindenburg Omen occurred in August and received wide attention in both the blogosphere and mainstream media. In contrast, the current signal has gone largely unnoticed which is fascinating from a contrarian point of view. As we all know, when everyone in the market expects one thing to happen (prices to rise) usually the opposite occurs.
