Market Watch

Official Hindenburg Omen Confirmed

You know the saying. They don’t happen often but when they do…….

So what is a Hindenburg Omen? It is the alignment of several technical factors that measure the underlying condition of the stock market — specifically the NYSE — such that the probability that a stock market crash occurs is higher than normal, and the probability of a severe decline is quite high. This Omen has appeared before all of the stock market crashes, or panic events, of the past 29 years except one, except the mini-crash of July/August 2011. Except for that one crash, no stock market crash (a decline greater than 15 percent) occurred over the past 29 years without the presence of a Hindenburg Omen.

We got a first Hindenburg Omen observation on Wednesday, May 29th, 2013, and a second official confirming Hindenburg Omen observation Friday, May 31st, 2013, meaning we are now on the clock watching for a stock market crash, and at the very least a significant decline.

Now that we have a second observation, we have an official confirmed Hindenburg Omen. This is the first Hindenburg Omen since November 12th, 2012, and only the fifth since 2008, the 2008 signal which of course led to the massive stock market crash in the autumn 2008, and the seventh since the Bear Market started in 2007 (we got one in 2007, one in 2008, two in 2010, two in 2012, and now one in 2013). We got crashes after both the October 2007 and June 2008 Hindenburg Omens.

“The rationale behind the indicator is that, under normal conditions, either a substantial number of stocks establish new annual highs or a large number set new lows — but not both.” When both new highs and new lows are large, “it indicates the market is undergoing a period of extreme divergence — many stocks establishing new highs and many setting new lows as well. Such divergence is not usually conducive to future rising prices. A healthy market requires some semblance of internal uniformity, and it doesn’t matter what direction that uniformity takes. Many new highs and very few lows is obviously bullish, but so is a great many new lows accompanied by few or no new highs. This is the condition that leads to important market bottoms.”

Our research noted that plunges can occur as soon as the next day, or as far into the future as four months. In either case, the warning is useful. It just means, if you want to play the short side after a confirmed signal, or move out of harms way, you must be prepared to see it happen as soon as the next day, or four months from now, possibly after you forgot about it. About half occurred within 41 days.

Based upon the five parameters noted above, here’s what we found: Confirmed Hindenburg Omens are very rare. There have been only 32 confirmed Hindenburg Omen signals over the past 29 years. November 2012’s was the 31st, and the current one, May 31st, 2013’s is the 32nd. This is amazing when you consider that during that time span, there were roughly 7,250 trading days. Of those 7,250 trading days where it was possible to generate a confirmed official Hindenburg Omen, only 203 (2.80 percent) generated one, clustering into 32 confirmed potential stock market crash signals. This is a very rare alignment, a rare but potentially dangerous condition in the stock market.

If we define a crash as a 15% decline, of the previous 31 confirmed Hindenburg Omen signals, eight (25.8 percent ) were followed by financial system threatening, life-as-we-know-it threatening stock market crashes. Three (9.8 percent) more were followed by stock market selling panics (10% to 14.9% declines). Four more (12.9 percent) resulted in sharp declines (8% to 9.9% drops). Six (19.3 percent) were followed by meaningful declines (5% to 7.9%), six (19.3 percent) saw mild declines (2.0% to 4.9%), and four (12.9 percent) were failures, with subsequent declines of 2.0% or less. Put another way,there is a 25.8 percent probability that a stock market crash — the big one — will occur after we get a confirmed (more than one in a cluster) Hindenburg Omen.There is a 35.6 percent probability that at least a panic sell-off will occur (a decline greater than 10 percent). There is a 48.5 percent probability that a sharp decline greater than 8.0 % will occur, and there is a 67.8 percent probability that a stock market decline of at least 5 percent will occur. Only one out of roughly 8 times will this signal fail.

All the biggies over the past 29 years with the exception of the July/August 2011 decline were preceded and identified by this signal (as defined with our five conditions). It was on the clock just before the stock market crash of the autumn of 2008. It was present and accounted for a few weeks before the stock market crash of 1987, was there three trading days before the mini crash panic of October 1989, showed up at the start of the 1990 recession, warned about trouble a few weeks prior to the L.T.C.M and Asian crises of 1998, announced that all was not right with the world after Y2K, telling us early 2000 was going to see a precipitous decline. The Hindenburg Omen gave us a three month heads-up on 9/11 (2001), and told us we would see panic selling into an October 2002 low, warned in October 2007 that a multi-month 16 percent plunge was about to start, from the DJIA’s all-time high. And it was on the clock three months before the stock market crash of the autumn 2008 into spring 2009 that wiped out 47.3 percent of the stock market’s value.

Full technical s can be read HERE. Could explain Soros recent Rope-a-Dope out of Equities. If your in Equities, best look around for a lifeboat.