(Hindenburg Omen stock market crash story updated for end of recession call by NBER, September market rally)
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Writing on RealMoney.com after the first Omen was triggered, Rev Shark noted the market voodoo being applied to the situation. "The logic behind this ominous-sounding indicator is this: When there are internal inconsistencies in the market that are causing a simultaneously high level of new highs and new lows, a greater risk exists that the resulting confusion and uncertainty will cause market players to exit... When the herd is confused and moving in two different directions, internally that is going to cause some problems." In technical terms, the Hindenburg Omen is only valid in a rising market -- as measured by the NYSE composite rolling average over the past 10 weeks; the number of stocks at a 52-week high must not be more than twice those stocks at a 52-week low, and the Hindenburg set of apocalyptic conditions must occur twice in a 30-day period. 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. While the Wikipedia entry on the Hindenburg Omen claims that the trigger is 2.2% of the NYSE total and others claim that 2.8% is the appropriate trigger, Miekka said that percentage was adjusted years ago to 2.5% to take into account the market move to decimalization. The Hindenburg Omen last occurred in October 2008, according to UBS data. And that's not all. The Hindenburg Omen perfect storm must also include a negative measure in the NYSE McClellan Oscillator, a measure of market momentum. If it sounds like the flux capacitor of Back to the Future, you just don't know how to trade the charts.
The Hindenberg Omen does have a decent track record. A UBS strategist told Bloomberg that the Hindenburg Omen signaled itself seven times in 2008, before the S&P posted its biggest annual drop since the Great Depression. A confirmed Hindenburg Omen has occurred prior to every major stock market crash since 1985, according to various market sources with their finger on the panic button. Ultimately, the Hindenburg Omen was supposed to be about market uncertainty rising above an acceptable level for stability, a technical indicator for mere investor anarchy being loosed upon the markets. It did seem before the September market rally that economic conditions were about as close to anarchy as it gets, with the U.S. unemployment picture still a mess and the European debt crisis still a foremost concern. However, a funny thing happened on the way to the imminent Hindenburg Omen stock market crash.
Vote Now on the Hindenburg Omen Recession Threat |
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Could the Hindenburg Omen simply have been an upside-down market signal? Instead of being a signal to sell, will it end up being relegated to the dustbin of trading history as another classic case of Warren Buffett's maxim to buy when you smell the most fear in the markets? In the midst of the September rally and the NBER pronouncement of the Great Recession's end it may seem that investors who cashed out of investments were duped by the Hindenburg Omen. Yet with President Obama conceding at a Town Hall meeting on Monday that the recession hasn't ended for many Americans -- even if NBER says it ended in June 2009 as a technical economic measurement -- have things changed all that much for the investor or average American? The Federal Reserve Open Committee meeting message on Tuesday was no ringing endorsement for the economy, keeping rates the same and with the Fed saying it may still step in to bolster the economy. The markets couldn't hold their gains on Tuesday after the Fed commentary. More than half of U.S. states (27 states) had unemployment rates that rose in August, the largest number in six months, the Labor Department said Tuesday, worse than the previous month and the highest number of states seeing the jobless rate increase since February. It's still the mid-point of the presidential election cycle, too, historically a bad time for the markets, and the Hindenburg Omen did sound its warnings ahead of the month of October -- i.e. stock market crash central. It may not be mere anarchy loosed upon the markets, but the bull is far from charging ahead. Indeed, the recent signals have overshadowed the Hindenburg Omen, and raised the question, Are you, Mr. Investor, any more confident about the immediate market outlook or still expecting the Hindenburg Omen to crash and burn the economy -- even, if now, thanks to NBER, it would have to be classified as a new recession? Take the poll below to see what TheStreet has to say about this issue. -- Written by Eric Rosenbaum from New York. Follow TheStreet.com on Twitter and become a fan on Facebook.