Hindenburg Omen Signal Generated

A Hindenburg Omen signal was generated on Thursday. The Hindenburg Omen often precedes a major decline (a decline of 15% or more) in the stock markets. The Omen often comes in clusters, and multiple occurrences of the Hindenburg Omen add statistical significance and reliability. If we receive a second Hindenburg Omen within 36 days, we then consider the signal confirmed and this greatly increases the odds of a big sell off.

A Hindenburg Omen occurs when:

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 or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is 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.

When all of these conditions are met on the same day a Hindenburg Omen is given.

Past occurrences and reliability:

Robert McHugh, of Safehaven.com, has reported on the performance of confirmed Hindenburg Omens going back to 1985 and here is what he found.

Confirmed Hindenburg Omens are very rare. There have been only 26 confirmed Hindenburg Omen signals over the past 22 years. This is amazing when you consider that during that time span, there were roughly 5,700 trading days. Of those 5,700 trading days where it was possible to generate a Hindenburg Omen, only 186 (3.2 percent) generated one, clustering into 26 confirmed stock market crash signals.

If we define a crash as a 15% decline, of the previous 25 confirmed Hindenburg
Omen signals, six (24.0 percent ) were followed by financial system threatening, life-as-we-know-it threatening stock market crashes. Three (12.0 percent) more were followed by stock market selling panics (10% to 14.9% declines). Four more (16.0 percent)resulted in sharp declines (8% to 9.9% drops). Six (24.0 percent) were followed by meaningful declines (5% to 7.9%), four (16.0 percent) saw mild declines (2.0% to 4.9%),and two (8.0 percent) were failures, with subsequent declines of 2.0% or less.

Put another way, there is a 24 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 36.0 percent probability that at least a panic sell-off will occur. There is a 52 percent probability that a sharp decline greater than 8.0 % will occur, and there is a 76 percent probability that a stock market decline of at least 5 percent will occur. Only one out of roughly 12 times will this signal fail.

All the biggies over the past 21 years were identified by this signal (as defined with our five conditions). 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, and told us we would see panic selling into an October 2002 low. And now we have another confirmed Hindenburg Omen signal, here in the autumn of 2005.

We will be watching the tape closely for a second occurrence and confirmation of the Hindenburg Omen.

We are currently out of equity ETF positions and in cash. We are carrying a few small positions, mostly in high dividend paying closed end funds. We will remain defensive as we wait for more clarity on economy and market direction.