Another Incidence of the Hindenburg Omen

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.

Still Another Hindenberg Confirmation

The market is now down 3.4% from the August 12 open, when the first Hindenburg Omen was sighted, on route to validating the prediction of a 5% drop. However, in the process it continues getting worse and worse - today we just got a third H.O. confirmation, and a 4th standalone HO event, as the market seems to be getting ever more schizophrenic, with increasing new highs and new lows, while the undercurrent is one of ever increasing implied correlation as noted earlier, as ever more asset managers simply rely on levered beta "strategies" to redeem their year. Unlike 2009, however, this time the trick won't fly, as it appears the market's downside potential is finally starting to be appreciated.

Hindenburg Confirmation #3 -- In One Week!

from Zero Hedge:

Longs may be forgiven if they are sweating their long positions over the weekend: not only did we just have a second, and far more solid Hindenburg Omen confirmation today, with 82 new highs, and 94 new lows, but the Saturday is the day when Iran launches its nuclear reactor, and everyone will be very jumpy regarding any piece of news out of the middle east. As for the H.O., the more validations we receive, the greater the confusion in the market, and the greater the possibility for a melt down (or up, as the case may be now that the market is unlike what it has ever been in the past). Furthermore, with implied correlation at record levels (JCJ at around 78), any potential crash will be like never before, as virtually all stocks now go up or down as one, more so than ever before. And should the HFT STOP command take place, the future should be very interesting indeed (at least for the primary dealers, and the Atari consoles which are unable to VWAP dump their holdings in the nano second before stuff goes bidless).

Hindenburg Omen Confirmed

from Zero Hedge blog:

Today we got our first Hindenburg Omen confirmation. The number of new highs was 136, and new lows was at 69 (per the traditional WSJ source). Granted this particular criteria set was a little weak as the 69 is precisely on the borderline for confirmation (the 2.2%), and the new highs number was not more than double the new lows (although it was close). Less gating were the McClellan oscillator which was negative at -83.6, and the 10 week MVA, which rose, which were the two remaining conditions. The first omen was spotted on August 12 - a week later the H.O has been confirmed. The more confirmations, the scarier it gets from a technical perspective, not to mention the conversion into a self-fulfilling prophecy (like every other technical indicator).

Hindenburg Omen Charts

24 examples of the Hindenburg Omen manifestations, posted by John D. Lee on ChartsGoneWild.com:

Many of you are probably wondering what the ”Hindenburg Omen” is, or “HO” for short, in technical analysis. My job is not to repeat the exact same thing as other people, so please read the below resources to get an understanding of this phenomenon before you look through my 24 charts.

Hindenburg Omen resources: Wikipedia, Zero Hedge, Stockcharts.com, Safe Haven, Dr. Robert McHugh, Ian Woodward. Dr. McHugh is the main researcher on the “HO” (is it wrong to call it that?!). You can find a lot of data and facts on the “HO” through these sites.

The one thing that none of these other sites actually did was chart the upclose shots of the time periods of the Hindenburg Omen occurrances. As the Chart Addict, I figured that I needed to step up to the plate and fill in this gap, regardless of the esoteric nature of this side of technical analysis.

Below are 24 occurances of the Hindenburg Omen in the NYSE from 1990 till 2010, a full two decades worth of upclose chart prOn.

It is a bit shocking how declines follow the signals as often as they do, however, keep in mind that several “HO’s” last for just a few days. “HO’s” have lasted from as little as 1 day to as many as 122 days. In addition, many reconfirmations of “HO’s” are in hindsight, and may be too late if a rally is underway. The timing of the “HO’s” is not exactly perfect as even the ones that do work take several days to materialize. Many times, “HO’s” precede large consolidation ranges. The statistics for outright crashes, panics, major selloffs, and minor selloffs are all true. Nearly half of the declines are in the double-digits (-10%+).

I wouldn’t exactly redefined my entire strategy simply based on the “HO”, but I would be mindful of the statistical significance of these “HO’s”. They work more often than not, regardless of how idiotic it may seem. I will let the charts do the talking and you guys can make up your own opinions, assumptions, and theories.

Sorry if the word “HO” bothers you. It stands for Hindenburg Omen in this post.

Full story with charts here.

Coverage of Hindenburg Omen Gathers Steam

I first read about it a few days ago when a comment on the Zero Hedge blog mentioned it. Then, the blog posted about it. Now, major news websites are mentioning it. 

NEW YORK (TheStreet) -- It may just be the summer doldrums, or the ominous occurrence of a Friday the 13 in mid-August, but the Hindenburg Omen -- a technical indicator of an impending stock market crash -- is suddenly as important a market mover as testimony from Federal Reserve chairman Ben Bernanke.
The blog Zero Hedge, writing in a vein that seems made for professional boxing or WWE pay-per-view event hype, describes the Hindenburg Omen as "Easily the most feared technical pattern in all of chartism (for the bullishly inclined). Those who know what it is, tend to have an atavistic reaction to its mere mention." 
In case you hadn't heard, Thursday's action on the New York Stock Exchange registered a technical anomaly known as the Hindenburg Omen. Read: just like the doomed German airship, the markets are fated to crash and burn. Still worse, Wednesday's trading action almost sparked Hindenburg Omen conditions. It takes two Hindenburg Omen trading days within a 36 day window to trigger the end of life in the markets as we know it.
Writing on RealMoney.com, Rev Shark notes of the market voodoo that "the logic behind this ominous-sounding indicator is this: When there are internal inconsistencies in the market that are causing a simultaneously high level of new highs and new lows, a greater risk exists that the resulting confusion and uncertainty will cause market players to exit... When the herd is confused and moving in two different directions, internally that is going to cause some problems."
But first the facts. There was a correction in the markets this week, and the sell-off triggered the Hindenburg conditions. The Hindenburg Omen occurs when an unusually high number of companies in the New York Stock Exchange reach 52-week highs and lows at the same time. The proportion of NYSE stock highs and lows must both exceed 2.2% of the total listed on the exchange. The Hindenburg Omen last occurred in October 2008, according to UBS data.
Additionally, the Hindenburg Omen is only valid in a rising market -- as measured by the NYSE composite rolling average over the past 10 weeks; the number of stocks at a 52-week high must not be more than twice those stocks at a 52-week low, and the Hindenburg set of apocalyptic conditions must occur twice in a 36 day period.
And that's not all. The Hindenburg Omen perfect storm must also include a negative measure in the NYSE McClellan Oscillator, a measure of market momentum. If it sounds like the flux capacitor of Back to the Future, you just don't know how to trade the charts.
The Hindenberg Omen does have a decent track record. A UBS strategist told Bloomberg that the Hindenburg Omen signaled itself seven times in 2008, before the S&P posted its biggest annual drop since the Great Depression. A confirmed Hindenburg Omen has occurred prior to every major stock market crash since 1985, according to various market sources with their finger on the panic button.
Jason Goepfert at Sentimentrader.com told RealMoney's Rev Shark that the Hindenburg Omen does have a fairly good track record of predicting weakness, especially when there are a cluster of such Omen days in a short time frame. The average return of the S&P 500 three months after the Omen is triggered is a loss of 2.6%, and the market was positive only 29% of the time.
In the mood for some more Hindenburg Omen doomsday numbers? The probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, according to historical data quoted on Benzinga. It usually takes place within 40 days of the first Hindenburg event. The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%.
That said, there are plenty of Hindenburg false alarms, too -- and, for that reason, some analysts claim that it requires not just two, but between three and five Hindenburg events within a 14-day window to really send the signal to take the chips off the market table.
Anyone ready for a game of craps or roulette? Maybe we should just put all the money under the mattress at this rate and hope the Hindenburg doesn't crash over our houses.
Some fear that the Hindenburg Omen is a self-fulfilling prophecy. Convince enough investors that the Omen exists and they will start selling en masse, causing a market crash.
One can argue that regardless of the Hindenburg Omen or not, more accepted technical indicators are not looking particularly good, so any equity investor out there who isn't already cautious probably will watch their portfolio crash and burn.
Putting market voodoo aside for the moment, the Standard & Poor's 500 Index decline between Tuesday and Thursday was its largest since July 1. Federal Reserve chairman Ben Bernanke recently described the economic outlook as "unusually uncertain," and this week when the Fed decided to directly stimulate the economy for the first time in a year, it gave as a reason that growth "is likely to be more modest" than previously forecast.
These aren't exactly the type of comments that one would describe as fanning the flames of market paranoia, but they could add a little hot air to the zeppelin's ride.
-- Written by Eric Rosenbaum from New York.

Hindenburg Omen Noticed by Wall Street Journal

Forget about Friday the 13th. Many on Wall Street took to whispering about an even scarier phenomenon—the "Hindenburg Omen."
The Omen, named after the famous German airship in 1937 that crashed in Lakehurst, N.J., is a technical indicator that foreshadows not just a bear market but a stock-market crash. Its creator, a blind mathematician named Jim Miekka, said his indicator is now predicting a market meltdown in September.
Wall Street has been abuzz about whether the Hindenburg Omen will come to bear, with some traders cautioning clients about the indicator and blogs pondering all the doom and gloom.