Hindenburg Omen Cluster Continues

UPDATED JUNE 19, 2013  - The Hindenburg Omen went off again today but as was the case with the recent signal on June 10th and the near miss of June 13th (below), it is yet another redundant signal since we already had a confirmed HO event 15 days ago on June 4th.  When clusters of HO signals like these begin to develop the message is more than clear... although the market is bouncing, although the VIX and VXX are showing ridiculous degrees of complacency, the markets continue to show serious degrees of polarity in that there are darned near as many stocks making new 52 week lows as there are making new highs.  How could anyone possibly have faith that the markets are going to continue to head higher from here even in the face of seemingly endless floods of liquidity courtesy of the Fed?  When the Hindenburg Omen goes off in clusters of alarms like this, it does so for a reason.  True enough, the Fed is determined not to let equities markets collapse.  But when the market internals are making it quite clear that despite the Fed's best efforts the market internals show serious weakness, the most prudent investors would take the hint and at least stand aside.

UPDATED JUNE 13, 2013  - The Hindenburg Omen came very close to going off again today but again, as was the case with the June 10th signal (below), it would have been considered as just another redundant red flag since we already had a confirmed HO event 9 days ago on June 4th.

UPDATED JUNE 10, 2013 - The Hindenburg Omen went off again today but it is a redundant signal since we already had a confirmed HO event 6 days ago on June 4th.  Nonetheless, and this is definitely worth noting, although the market has put in a bounce of sorts nothing has changed internally.  The polarity on the NYSE that the HO is concerned about is still there.

....................Original Article of June 4th Follows ....................

 
According to the WSJ, the official source for data regarding new 52 week highs and lows on the NYSE, with 10 minutes remaining in the trading day the final piece of the puzzle was put in place when the Hindenburg Omen issued its second signal in four days.  And with that we now have an official Hindenburg Omen event, the first since August of 2010.

As all my followers know by now, in order for an official Hindenburg Omen signal to go into the history books the HO must issue two signals within 30 trading days.  One prominent analyst declares 36 days but is ambiguous about whether that is calendar days or trading days.  This has caused some confusion regarding that rule, so here it is according to the inventor of the HO, Mr. Jim Meikka:  The rule is 30 trading days.

Therefore, last Friday's signal occurred too late to be considered as the second and confirming signal for the April 15th sighting.  With today's signal, the second in only 4 calendar days, that entire discussion is now a moot point. We can confirm that the Hindenburg Omen has just issued its first "official event" since August 2010.  There could very well be more occurrences of the HO signal tomorrow or next week or the week after that, but now that the second signal has been issued today any further alerts will be considered redundant.  They are not required and they are not taken into consideration.  All they would accomplish would be to reconfirm that the market remains very polarized.  In fact, if a serious decline were to get underway the equities markets should enter into a state where there is no more polarization because the majority of the horses will be pulling the stock wagon downhill.  Therefore any further HO signals are not only irrelevant, they are likely to stop occurring should the markets decide to head south with some authority.

As well, and this is a ruling factor, if the NYSE begins to fall from here the 50 day moving average on the NYSE will soon be turning downward which would effectively render the Hindenburg Omen incapable of issuing any further signals.  Because of the 50 day MA rule, there is actually a fairly small window of opportunity within which the HO can issue its alerts and once the MA rolls lower that window is closed.  This has always been one of the primary reasons the Hindenburg Omen goes off so seldom.  It's also the primary cause of erroneous claims by uninformed analysts that the HO had gone off when in fact it had not (because the moving average had rolled over which to the HO is like unplugging your TV set from the wall).  And by extension, it's the primary reason that the HO gets a bad name in the press, one that it absolutely does not deserve.  In fact, and you have no idea how much this irks me, feel free to click this link to visit my last report on the HO and see for yourself.  One commenter asked the damning question "How many times has this thing failed over the past 4 years?".  And the answer of course is "none".  For god's sake, it has only gone off once in the past 4 years (meaning a 'confirmed' event).

Click here for a link to the live and updating chart.

By now most of my regular followers have probably read the short article entitled "So The HO Issues A Signal.  What Happens Next?"  If you haven't read it yet, by all means feel free to hit the link and do so now.  For convenience sake, the record of what occurred in the markets following all of the previous Hindenburg Omen signals are listed below.  This data is supplied by Dr. Robert McHugh who has also compiled an excellent list of what transpired after every HO event in the past.  You can find that data here:

Major Crash - 27% probability
Selling panic of at least 10-15% - 39% probability
Sharp decline of at least 8-10% - 54% probability
Meaningful decline of at least 5-8% - 77% probability
Mild decline of at least 2-5% - 92% probability
The HO signal is an outright miss - 7.7% probability (one out of 13 times)

There's not much else to report regarding the HO, nor would I dare make any predictions about what comes next.  All we know with certainty is that the Fed has proven to be very powerful in not only saving the markets from the decline that should have kept going right on through the March 2009 low, but in driving the markets higher from there by a mind blowing 153.4% (S&P 500).  In other words, the Fed has driven the stock markets up at the rate of 24.56% per year (compounded) for 51 consecutive months now and claims this meteoric rise is due to "improving economic conditions".  Give me a break! 

To say that the recent lofty heights of equities markets around the world are way out of line and totally artificial would be the understatement of this century.  Therefore, to expect that the markets will put in a reasonably mild correction of only 3 to 5% is probably a bit on the optimistic side.  Nonetheless, a minor decline is entirely possible, at least as revealed in the HO's record book.  And in light of the obvious intentions of the meddling central banks of the world, a minor decline is possible.

To put a positive spin on the possibilities that lie ahead for the global stock markets, the record clearly shows that there is a 73% chance that a major life changing stock market event is not going to occur.  And looking at the bright side, there's a 50% chance that the decline will be no greater than 10%.  As Jim Meikka himself said "The Hindenburg Omen is poorly named."  It was not Mr. Meikka who gave this amazing indicator that title, it was his predecessor Kennedy Gammage who had been working on a similar indicator using the McClellan Oscillator as one of it's primary components.  To quote Tom McClellan:

"The ominous sounding name of this signal comes from the late Kennedy Gammage, who passed away Jan. 3, 2006, just a few months after he retired from writing The Richland Report newsletter.  Ken was one of the great proponents of the McClellan Oscillator and Summation Index, and was a big reason why they came to be so well known.  The McClellan Oscillator being positive or negative is one of the criteria for a Hindenburg Omen, so it was probably out of working with that indicator that Miekka came into contact with Ken Gammage.  I suspect that the idea for the name "Hindenburg" was related to a similar signal using NH and NL called the "Titanic Syndrome" which was developed by the late Bill Ohama."

So there you have it my friends.  We should probably expect just about anything now, but it wouldn't hurt that all of us think positively and keep our fingers crossed for the "not greater than 10%" theme. Our chances are 50/50.

Wishing all of you the very best