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Friday, October 23, 2009

The Hindenburg Omen

What is it?

It is a set of conditions, and rules that when all are met, greatly increases the odds of a large sell-off, or crash of the markets. In fact no crashes in the last 22 years have happened, that did not first have a confirmed signal of a Hindenburg Omen. Just because all the conditions have been might, and it becomes a confirmed Hindenburg Omen does not guarantee a crash, only greatly increases the chances of a severe market correction ahead. Another way to think about it is without a confirmed Hindenburg Omen in place, Bulls can sleep a little better at night knowing that most likely they will not awaken to the market down 10%. In fact the odds of a crash based upon the history since 1985 is 27% chance after two or more signals were confirmed.

The best way to think about it is under normal conditions, there can be large number of stocks, setting new 52 week highs, or a large number setting 52 week lows, but not both. Things become out of balance when large numbers of stocks are setting new highs, and lows at the same time. Having one sector soaring, and another setting new lows is not good in the balance of a healthy market.

The traditional definition of a Hindenburg Omen is that the daily number of NYSE New 52 Week Highs and the Daily number of New 52 Week Lows must both be so high as to have the lesser of the two be greater than 2.2 percent of total NYSE issues traded that day.

And that has been updated to include two more sets of conditions to filter out false readings;

1-That 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 75. (this is not a rule but a function of the 2.2% of the total issues)

3-That the NYSE 10 Week moving average is rising.

4-That the McClellan Oscillator is negative on that 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). This condition is absolutely mandatory.

Rules 1 and 2, are pretty much addressing the same criteria, because if you have 75 issues making new highs/lows, then mathematically, you also have achieved 2.2%. The numbers of issues fluctuates daily and it is quicker to use rule number 2. In other words, if condition 2 has been met, then condition 1 will be met by default.

So, now that you have all five conditions met, now what?

You have an unconfirmed Hindenburg Omen, In order to have a CONFIRMED Hindenburg Omen you must have more then one unconfirmed Hindenburg Omen, or signal, in a 36 day or less period.

Another interesting observation is that once you get two confirmed Hindenburg Omens in a 36 day period , the probability of a severe decline does not seem to increase as more Omens occur, it is possible to have multiple Omens before a crash happens. Multiple signals are telling us things are not getting better, that something continues to be out of balance in the markets.

McHugh's research noted that plunges can occur as soon as the next day, or as far into the future as four months.

So where are we at now?

This is the 10 week moving average on the NYSE composite index. Currently it is rising, and fulfills requirement #3. This is a given and will continue rising for sometime, even with a sell-off it will be slow to start turning down.

This is the McClellan Oscillator, currently it is in negative territory at -49.03, and fulfills requirement #4. This is an indicator that needs to be check daily as it fluctuates back and forth weekly

This is the NYSE new 52 week highs, this also is a given for now, and will stay above 75 until we see some more downside. Currently reading 175 new 52 week highs after the close today, so it fills the requirement of its role in rule number 1 that new 52 week highs must be above 75.

And this is the NYSE new 52 week lows, I saved it for last because we are not near a point, without some selling pressure to worry about this one fulfilling its requirement for rules number 1 and 2. After the close today, there were only 2 new 52 week lows, far below the requirement of 75+.

So we have rules number 1 and 2, waiting for more new 52 week lows to be made. This will require a sell-off of a portion, or sector of the index to start throwing it out of balance. Nothing that will happen over night.

Rule number 3, the 10 week MA is satisfied, and will stay there for awhile.

Rule number 4 needs to be checked daily, but one should not concern themselves until we start seeing more 52 week lows.

Rule number 5, can not even kick in until rules number 1 and 2 are satisfied.

Conclusion- Monday morning the stock market will not crash according to the Hindenburg Omen, we will need a small bleed-off to start seeing an increase in the 52 week lows. The best thing to do for now is to keep your eyes on the weaker sectors. I did do a search on CAPS stock screener, and found 84 stocks that were from 0-5% above their 52 week lows, Banks and Pharmaceuticals led the list.
As the lows start increasing I am sure it will fill the blogs with chat, and most will be aware of an approaching Hindenburg Omen before it gets confirmed. So you can sleep well for now, hehe!!

So now you know a little about what the Hindenburg Omen is, and can track it for yourself (I will have the charts posted in my public charts at Stock charts).

I would like to give a big Kudos to Dr. Robert McHugh, he is in the forefront of the research and collection of data for the Hindenburg Omen, and his named showed up in over 90% of the articles I read in preparation of this post.

McHugh's website, Technical Indicator Index

Here is a more detailed and in-depth article for more information. The Market Oracle.

4 comments:

  1. Hey Col, Man, this is an awesome writeup! Thanks for taking the time and sharing!

    I agree that we need to have a major sector weakening before condition 5 is met:

    Financials are weaker now that the rest of the market. However most are still up 50-500% off the bottom. I find it unlikely that this will be the sector that makes new 52 week lows.

    A Dollar rally will send oil down. The energy sector might take a dive for awhile. However they too have rallied hard off the bottom.

    I wonder if we could put together a stock screen of issues 10% above their 52 week lows, sorted by sector, and maybe come up with a few theories on how this may play out.

    Food for thought! Thanks bro!!

    ReplyDelete
  2. Howdy Binve, I did do a search on CAPS stock screener, and found 84 stocks that were from 0-5% above their 52 week lows, Banks and Pharmaceuticals led the list. I tried to link to the list, but the URL was way too long to post. Try this link, and just hit "submit" for the results.

    http://msncaps.fool.com/screener.aspx?param=1&RunDate=2009-10-23&MarketCap=4&themetype=msn&fooldomain=msncaps.fool.com&max_LowPriceLastFiftyTwoWeeksPct=5&min_LowPriceLastFiftyTwoWeeksPct=0&search1=Search%20Now&

    ReplyDelete
  3. Binve, I made a link to the results of the search on CAPS, and added it to the original post.
    Thanks Bro for the help :)
    Michael

    ReplyDelete
  4. It would make sense since the policies of the "democratic" liberals is to destroy healthcare and punish the banks. As if they won't pass on their costs to the consumer. Tax us to stimulate the economy and then make us pay it back...YAY!

    ReplyDelete