(Article updated with information on market reaching a second Hindenburg Omen on Aug. 19.)
NEW YORK (
) -- If it feels as though you can't pull the trigger on a trade today without first consulting the
, you are not alone -- and
has help for you to avoid the stock market crash that, at this point, it may seem like the Hindenburg Omen all but guarantees.
The Hindenburg Omen is a somewhat obscure technical indicator that has suddenly become a market blog sensation. Last weekend, unlike the doomed German airship which crashed and burned (before providing a name for the bearish market signal) the Hindenburg Omen soared to become one of the most popular Google search terms. It's possible that only Federal Reserve chairman Ben Bernanke has more power to move the markets right now.
Now, according to
we had a second Hindenburg Omen trigger yesterday. Some technicians regard this as confirmation of the first reading and, therefore, a much more dire situation.
Should investors be keeping their finger on the panic button as a result of a technical indicator that many investors may have not even known about just a few days ago?
One of the main criteria for the Hindenburg Omen to be triggered is a negative reading in the McClellan Oscillator. The McClellan Oscillator is a technical indicator that relates to the market breadth, or what is known as the daily advance-decline line, tracking the difference between the number of stocks moving both higher and lower. As long as the McClellan Oscillator is positive, there is no Hindenburg Omen.
recently caught up with Tom McClellan, editor of the
McClellan Market Report
, and Son of the McClellan Oscillator -- Tom's father Sherman McClellan invented the Oscillator. McClellan said investors might want to take a step back -- and take a more comprehensive view of the market outlook -- before betting all, or selling all, on the Hindenburg Omen.
TheStreet:There's been a healthy level of debate about the Hindenburg Omen, with some blogs quoting figures that it's only proven to be successful 25% of the time. Why should investors pay attention to the Hindenburg Omen at all?
My response to the criticism that the Hindenburg Omen has only worked 25% of the time is to ask, What's the track record of a railroad crossing? Plenty of times a railroad crossing signal is triggered but there is no train. When one of these warnings is signaled, an investor needs to remember that it's simply telling you conditions exist for something to happen, but it doesn't necessary mean it will happen. It's nice to know, more or less.
The tendency of people to turn something like this into a trading system is not a proper usage. It's a warning sign and an investor should never use one piece of information. Take 2007, for example. When you look at the charts along the way up towards the final high in 2007, there were lots of these warnings signs.
There were at least 7 Hindenburg Omen signals on the way up towards the last market crash, according to McClellan data. Any one of these warnings signs all by itself could arguably be dismissed.
TheStreet: Therefore, the Hindenburg Omen can be dismissed?
The Hindenburg Omen has a 30-year history, and the fact of the matter is that we don't get a bear market without one of these signals. You don't get a bear market all the time, but you never see a bear market come as a complete surprise with this signal. To move from bears to canines, think of it this way: every time a dog bares its teeth it doesn't bite you, but it's signaling that it might bite you.
TheStreet: You mention that the Hindenburg Omen had a 30-year history. So what about Hindenburg Omen pre-history? How different was the data before 1980 and how important is that to understanding the data used today to signal the Hindenburg Omen?
The primary number being played with in this data set is the number of new highs and new lows and the methodology is the 52-week look-back period. Prior to 1979, there was a different methodology for counting highs and lows. No one had computers. Highs and lows were tracked with pencils, and new highs and lows were calendar year-based. Therefore, the problem is that on Jan. 2 every stock would be hitting a new high or low. The solution was to use the previous year high and low for the first four months of the new year, and then around April, switch to the new calendar year. The look-back period could range from 4 months to 16 months, so any Hindenburg Omen data trying to track its predictive success previous to 1980 is not the same.
TheStreet: How are you trading the markets based on the Hindenburg Omen?
I look at so many different pieces of information on a daily basis, and every day there are conflicting indications and it's a matter of which indication to pay attention to on which particular day. At a primary level of market outlook, and given the Hindenburg Omen, my main argument would be that I see lots of liquidity, and that when the level of liquidity is strong it can trump a lot of other indicators. So for the moment, at least, even as we acknowledge bearish signals, it's not time to start worrying about how to make money on the downside.
The problem is not liquidity-related right now, but emotional. It's been three years since we had a Hindenburg Omen and we haven't had the right conditions until now. Also, you didn't need a Hindenburg Omen in 2008 to tell you that there was a problem. When there is an uptrend in the market, that's when you need it. So I look at it and acknowledge it, but as long as the McClellan Oscillator turns back positive I say it's not raining outside.
Liquidity signals are saying something other than prices. When you see that the S&P 500 is still below its 2007 high, that's a negative, but the advance decline line has already exceeded its 2007 high, so there is disagreement there. You can't have a strong advance-decline line in absence of strong liquidity. So who do you listen to? I can only say that it's all something to listen to.
TheStreet: Could it just be a slow moment in the news cycle?
One data set that is different today than in the past is the blogosphere itself. The blogosphere is larger than it ever was, so you have to adjust for the growth of the blogosphere when thinking about how pervasive the Hindenburg Omen has become in the past few days. It is a slow news period, too, with the August recess in Washington D.C., and no terrorist bombings lately, among a million other things. We have to talk about something, but I think that type of media cynicism misses the mark in this case.
Despite the market showing strong liquidity, remember that economic pessimism is rampant out there, not investment pessimism, but economic sentiment that is horrible. People are about as pessimistic as they were in 2008 for whatever reason, and I would argue that the Hindenburg Omen is getting a lot of attention precisely because people are looking for reasons to fight against the tide of pessimism.
-- Written by Eric Rosenbaum from New York.
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