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Hindenburg Omen: What a Stock Market Crash Would Mean for the Consumer Sector

(Hindenburg Omen stock market crash story updated with financial adviser's commentary about third Hindenburg Omen indicator)
NEW YORK (TheStreet) -- Following a technical abnormality known as the Hindenburg Omen (widely believed to be a precursor to a stock market crash) was reached on the New York Stock Exchange three times in August, equity analysts tell TheStreet that large consumer good stocks would fare better than most in the event of a stock market bloodbath.

It is said by some that two Hindenburg Omen occurrences within a 30-day window is an all-but guaranteed trigger of a stock market crash. The Hindenburg Omen occurs when an unusually high number of companies in the New York Stock Exchange reach 52-week highs and lows at the same time. The proportion of NYSE stock highs and lows must both exceed 2.5% of the total listed on the exchange.

Citing Sentimentrader.com, RealMoney.com contributor and CEO of Shark Asset Management Rev Shark noted in his RealMoney.com column Friday morning that we had a second Hindenburg Omen trigger last Thursday. This Wed. Shark noted that the day before, the Hindenburg Omen indicator occurred for the third time in a just a few weeks.

"I know there are many who view this dramatically named indicator as a joke, but statistically it has worked well especially when it is triggered several times within short time frame," Shark wrote. "I believe we have an oversold bounce setting up here soon but the big picture doesn't look so hot and the 'Omen' is supportive of that fact."

Meanwhile, Timothy Collins, RealMoney contributor and founder of TangleTrade Management wrote in a recent column that the market needs some good news soon. "There isn't much to write in favor of the bulls at the moment. Some can point to the M&A action, but the response has been more a questioning of the prices paid or the choice of target. In other words, the deals are being questioned rather than celebrated."

Collins said that ordinarily he would view the fact that the VIX volatility index hasn't hit a new high since the July 4 holiday period positively. However, the subdued VIX combined with the Hindenburg Omen occurrences has "resulted in very negative equity action." The current situation, he says, makes him nervous, given that the current VIX follows the path of previous sell-offs.

That said, stocks like P&G (PG), J&J (JNJ) and Altria (MO), which are "all pretty good cash flow generators," as RealMoney contributor and Trinity Asset Management's Brian Gilmartin notes, would definitely be "a flight-to-safety trade if the market declines 10%."

Hindenburg

Stephanie Link, director of research and vice president of strategy for TheStreet, likewise notes that "if we crash [the top-performing consumer good stocks] would just go down 'less.'"

"The yields are compelling, particularly Altria," Link says of top-performing consumer good stocks.

"There is no doubt the consumer is pulling back as the jobs picture and shaky market has hit confidence," she told TheStreet. "There have been a number of disappointing quarters out of retail and HHP (household and personal-care products) or staples stocks (Colgate-Palmolive (CL), Kellogg (K), Unilever (UN), Ralcorp (RAH), Energizer (ENR), J&J, J.C. Penney (JCP) ).

"I think how you need to look at it is that there are always winners and losers (from a stock point of view) in every category, no matter what the macro implies -- whether it be superior size or scale, productivity measures, internal restructurings that help a company outperform on the bottom line despite the weak macro," said Link.

Link says that, in her estimation, the strongest consumer stocks include P&G -- with its new management team, new strategy involving investing in its brands to further expand scale, broad product line and focus on emerging markets. Link notes that the company's quarter was "far stronger" than such peers as Colgate, Clorox (CLX) and Unilever, with the company's volumes up 8% and pricing down a mere 1%.

Stock quotes in this article: PG 

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