As all of you know by now, the Hindenburg Omen has put forth one of the strongest signals in its history, as judged by the tightest cluster of signals ever produced... as far as I know. Let's put it this way, with 6
|"Are you paying attention?" testing machine|
So now that we've accepted that the current Hindenburg Omen event is at the very least the real deal, we should embrace this rare opportunity to pay attention and watch how the drama unfolds. And to that end, one of the questions that has been asked most frequently as of late is this; "Does the number of signals, or the type of cluster, have any predictive value about the extent of the decline that might ensue?". The short answer, the most common response, and the answer I have used to squirm out of doing a ton of work in the form of back-research, is "No! Once the HO has issued a confirmed signal, as far as the number of signals is concerned, all we can do is refer to the past history of 'what happened next' and take our best guess. The actual number of subsequent (and redundant) signals is of no value in determining how far the NYSE might drop.". That also happens to be the 'correct' answer.
But I have never heard this question asked: "Does the steepness of the rally prior to a confirmed Hindenburg event offer any predictive value?". What a heck of a great question that is! And one would have to think that of all the factors to ponder, that is probably the most logical one to investigate. I have never done that investigation. First of all, I didn't even think of it. And secondly, it represents a lot of work, too much for the little time I have. In fact, keeping my eye on the HO and reporting on it has taken up way too much of my time and focus over the past 4 years as it is... to the extent that I haven't published any article on any other topic since March 16th. I have other things to do you know. I have to tend to things. Like, I take a bath every single month... sometimes more than once.
|S. Cross, seen only by visionaries|
|Livin' the good life 'down under'.|
ENTER WAVE RIDER: Right out of the blue, totally unsolicited, this man who seldom speaks pops up out of nowhere at 2 o'clock in the morning and delivers one of the finest detailed, properly focused, thinking-outside-the-box, analyses I've seen in quite some time. It's targeted at exactly the right question: "Does the steepness of the rally prior to a confirmed Hindenburg event offer any predictive value?". Wave Rider actually went to the trouble to do that analysis, going all the way back to 1986. And then he handed it to us. What a gift! Not unlike Satoshie Nakamoto of Bitcoin fame. But unlike Satoshie, Wave Rider does indeed exist. With his gracious permission, I'm proud to offer readers his report as follows:
His basis: "I have always been interested that the number of sightings of the HO in a cluster does not seem to be a predictor of the strength or timing of any subsequent downturn. I have therefore been spending some time on the keyboard examining all the data associated with the recorded confirmed HO's going back to 1986."
His qualifiers: "Rather than use the DJIA that Dr. Robert McHugh used, I have used the S&P as it probably gives a better indication of the wider market. You still get the same approximate proportions of declines that are regularly quoted for the HO. i.e. 25% of the time the market falls by 15% or more, etc."
His general observation: "The interesting thing though, is that while the number of sightings in a cluster is no real guide to the dimension of any decline, the pace of the rising market before a confirmed HO is. Generally, the majority of confirmed HO with subsequent major declines have come after the market has averaged a gain of over 0.08% per day since the low that followed the previous HO. How long ago the last HO occurred does not seem to affect this observation."
The data he uncovered: "The results of the HO which followed daily gains averaging over 0.08% were -31%, -30%,-21%,-18%, -15%, -10%, -5%, -3% and 0%. That's 6 out of the 8 declines of 10% or more. By comparison, in the case of all other confirmed HO where the average daily rise of the market was less than 0.08% the average decline after a HO averaged less than 7%. And that was only brought up that high by a couple of outrider observations."
An additional point: Hence the rule "The faster they rise the further they might fall". Incidentally, the average daily growth rate before the August 5, 2013 HO was 0.193%. That is by far the highest ever, except the doubtful Dec 1998 HO."
[AR: Good lord, I hope readers appreciate the implications of that last "additional point".]
As a result of my request, WR revisited his work just to make sure he was satisfied with it, and then did offer a few additional comments and clarifiers. In order that you can easily find all his commentary, I'm happy to provide this link that should take you directly to the bundle he initially dropped on my desk, this one which will take you directly to the comment which includes his data set, and this link which would take you to the entire blog where you can scroll the comments section to read Wave Rider's additional commentary and detail, after the fact.