Regarding HO Signals - A Brilliant Analysis Out of Tasmania

Hello friends, followers, random readers, skeptics, debunkers, and curious onlookers.  It appears we have been given a gift... and I write this article in order to share it with you.

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

'real' signals in 8 trading days who's going to quibble?  That's a strong enough warning for anybody who is at least half lucid.  Consider this... if you and your lovely family were out sailing on the Gulf of Oman some beautiful Saturday afternoon in your 42 footer, and the Iranian navy fired a 6-pounder across your bow, you know darned well you'd take notice.  The prudent sailor might even take the hint and reverse course.  But naturally there are always the few heroes who might be considered as... what's the best word... daft... the ones who would wait for a second volley just to be sure.  Not a smart choice in my opinion.  Not when taking cannon fire.  And especially not when the HO is firing the volleys.  For, he who dares hold his course even after 6 rounds have whizzed past his nose, each successive shot being closer than the last... well the odds are high that sailor's ship is surely destined to take one up the assigned target.

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

But wait!  The strangest thing just happened.  Right out of the blue, at 2:00 in the morning on Friday, an old friend of mine from Tasmania who I haven't seen in at least 2 years pops up on Seeking Alpha and drops the whole bundle on my desk.  Let me back up a moment and tell you who this guy is.  He's an occasional commenter who goes by the name of Wave Rider.  Why the name Wave Rider?  I can only guess, but since he's from Tasmania I think it's safe to assume that he has done a little surfing somewhere along the line.  I hadn't really spoken with Mr. Rider all that often in the past, but I definitely remember him and do recall that we had some nice exchanges, beginning perhaps 3-4 years ago.  To be honest I don't even remember where that might have happened because we first met before 'this' blog even came into existence.  On second thought, it was probably over at Seeking Alpha.  In any case, I recall that Rider made a lot of sense and he was a nice fellow.  The type of guy I'd love to have a beer with some day.

Livin' the good life 'down under'.

With the name Wave Rider maybe he's referring to Elliott Waves.  But I can't help but to think of Tasmanians,  Kiwis and Australians as wavers of the water sports variety.  One thing I will state with all seriousness though, over the past 5 years I noticed that Aussies and Kiwis, for whatever reason, have amazing talents at technical analysis.  I'm dead serious... their ability to make sense out of mayhem regarding Elliott Wave Theory is truly impressive.  Coming up with Elliott Wave predictions is as much an art as a science and it's not easy to do.  I don't have the patience for it.  I don't thrive well in an environment where "being wrong quite often and having to find a viable alternative" is acceptable.  As a natural response to my own ineptitude, I have become acutely cognizant of real talent when I see it.  And those deep Southerners have it in spades.  Not to disparage accomplished EW practitioners from many other parts of the world who are very good at it as well.  It's just that... I don't know what it is, perhaps it has something to do with living under the Southern Cross, but man... people living 'down under' just seem to have a slightly different type of vision.  Clearer vision.  And it appears that applies to people living on Tasmania as well.

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:

=========================

[highlights by AR to draw attention to key words]

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."

Wave Rider's Conclusion: "The interesting thing about the cluster of HO you are currently recording is that the average daily gain since the market low following the last confirmed HO is the second highest on record. That assumes the May/June HO is considered a different one to the August one we are currently monitoring (AR's note: correct assumption). This suggests the present HO could be a portent for a very significant market decline indeed."

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".]

========================= 

I also hope readers appreciate how many hours went into this analysis.  When I asked Wave Rider for his permission to reproduce this meaningful work, he graciously granted it although initially he hadn't anticipated that his offering would reach this wider audience [yes, this blog gets far more weekly visits than the HO blog at Seeking Alpha does, not to mention the huge exposure that Global Economic Intersection will also be providing for Mr. Rider's Opus].

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.

On behalf of all readers, I offer our sincere thanks Wave Rider. We should also accept and acknowledge that Mr. Rider did not make any prediction, he simply presented a beautiful piece of work for our consideration... which is exactly the same as what the Hindenburg Omen itself does.  The HO simply presents the facts and contrary to popular misconception, does not make any predictions.  With that sorrily-misunderstood fact now finally (hopefully) becoming clear to the debunkers, we recognize that Wave Rider's analysis is simply much too good to languish in that now-very-quiet room over at Seeking Alpha.  This is very valuable stuff.  And for that... payment is in liquid gold:

CHEERS MATE!

Hindenburg Omen Fires off 3rd Volley in 4 Days

Just a quick update. As readers are aware by now, the Hindenburg Omen fired off a new signal on Monday [when I wasn't looking because it was a holiday in Canada :-) ]

As I reported that evening, with the most recent HO signal having occurred on June 19th, the Monday signal could have been considered as part of a larger cluster that began back in June.  But then the HO issued another signal on Tuesday in which there were considerably more new lows generated than new highs.  And today, yet another signal has occurred.  No matter how we want to classify this cluster, the message is the same... that although the NYSE ($NYA) is still officially rising (as determined by the fact that the 50 day MA on the NYSE is rising), there is still a horrid degree of polarity that the HO was designed to detect and issue its alerts on.

So what happens next?  If you haven't read the answer to that question yet... you can find it here.  In brief... it's not necessarily the end of the world.  In fact there is a 73% chance that there will not be a major stock market crash.  Gotta think positively, right?

So there you have it... HO signals issued on August 5th, 6th, 8th, 9th,13th and 14th, 2013.

Just a reminder....

 How fast can a bubble pop?  Faster than the blink of an eye!

Hindenburg Omen Fires Off Another Volley

Just a short report today friends.  It was a long weekend in Canada so I took my eye off the markets for today.  But when I checked the market internals stats this evening I was a bit surprised to have discovered that the Hindenburg Omen issued another signal today.  It was a rather strange one as well because the numbers for the new 52 week highs and lows were BOTH higher than usual for an HO signal day.  Nonetheless, all conditions were met so the market has generated another HO signal.

With the last HO signal having occurred on June 19th, this one could be still be considered as part of a larger cluster that began back then.  No matter how we want to classify it though, the message is the same... that although the market is still officially rising (as determined by the fact that the 50 day MA on the NYSE is rising), while there were 206 new 52 week highs generated, there were ALSO 111 new lows.  And that dear readers is the exact type of polarity that the HO was designed to detect and issue an alert on.

So there you have it... another HO signal issued on August 5th, 2013.

Just a reminder....

 How fast can a bubble pop?  Faster than the blink of an eye!

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

Hindenburg Omen Now Official - Second Signal In 4 Days

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, it does so for a reason.

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 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