Kass: Market Divergence Should Worry You

The "Hindenburg Omen" is a signal in technical analysis that attempts to forecast the growing probability of a market drop of meaningful proportion by gauging breadth measures.

In normal circumstances, "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 stock market is undergoing a period of extreme divergence. Such a divergence is not usually conducive to future prices. A healthy market requires some degree of internal uniformity, whether the direction of that uniformity is up or down."

According to Wikipedia, here are the criteria for a Hindenburg event:

• 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% of total NYSE issues traded that day.
• The smaller of these numbers is greater than 79.
• The NYSE 10-week moving average is rising.
• The McClellan Oscillator is negative on that same day.
• 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.

Here is a more thorough explanation.

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10:24 a.m. EDT

Two Important Things I Am Hearing

I am very busy trading today, but there are two important things I keep on hearing:

1. Merrill Lynch's(MER Quote) writedowns will be larger than many expect.

2. Citigroup(C Quote) is seriously considering a spinoff of several of its businesses.

I am trading from the short side, with the expectation of a reversal lower during the day.

Today the Nasdaq is up 1%, but NDX breadth is negative. This could be Hindenburg!

Position: Short QQQQ

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11:33 a.m. EDT

Private Mortgage Insurers at New Lows

The market is ill-prepared for a failure of a major private mortgage insurer.

I am short all of them.

The shares of private mortgage insurers, despite the rally of the last two days, are at new lows. And despite "value investors" all over CNBC during the last three months suggesting the group was oversold, they are not oversold.

They are failing institutions that lie at the epicenter of the housing problem.

Position: Short RDN, PMI, MTG and GNW