Ian Woodward's Investing Blog

The Hindenburgh Omen is back again – June 17th, 2008

After a potential False Alarm a week ago last Friday which I covered by citing a Phantom Lone Ranger Hindenburg Omen, the “beast” is back again.  Yes, we got a firm signal this time as shown in the picture below, thanks to our proprietary indicators from the HGS Investor Software!

hindy

 

  1. Whether the previous one was true or false remains a mystery.  I did follow up as promised with a note to our Data Supplier, but as luck would have it the storms and floods in the mid-west took out the Servers, Electricity and all, so my note went into the ether.  Anyway, we certainly have a signal this time and as I can see by the flurry of people visiting my blog including my friends from overseas in Greece and Finland, the Europeans are certainly on their toes and concerned that the famous Hindenburg Omen (HO) has struck again and they know where to come for the Heads-Up!  Even Google seems to have my blog on their radar as I am in the Images Section if you take the trouble to type Hindenburg Omen and make sure you click on their Images Tab.

  2. This on top of the news from some of my friends in e-mails to me this morning that the:

  3. >>>The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks. “A very nasty period is soon to be upon us – be prepared,” said Bob Janjuah, the bank’s credit strategist.  A report by the bank’s research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as “all the chickens come home to roost” from the excesses of the global boom, with contagion spreading across Europe and emerging markets.<<<

  4. The traditional definition of a Hindenburg Omen has five criteria:
  • 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.
  • That the smaller of these numbers is greater than 79.
  • That the NYSE 10 Week moving average is rising.
  • That the McClellan Oscillator is negative on that same day.
  • 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.

A confirmed Hindenburg Omen occurs if a second (or more) Hindenburg Omen signals occur during a 36-day period from the first signal.Now don’t panic, but forewarned is fore-armed.  Keep your powder dry and don’t be too complacent is the watchword.  Please understand that it takes a lot of factors to trigger the HO, but it seems the real sign is that the market is jittery right now and we may need a few more of these to really get us to take major defensive action.  In any event all HGS Investors are already playing this market close to the vest and the only ones sitting out are what I have called the Type 4, Long Term Buy and Hold Types, who continue to wait for the Short and Long Term Targets I have spelled out for you are traversed. By the looks of things it seems that will be a while longer.

Types 1, 2 and maybe 3 are having all sorts of fun on both sides of this market, but as usual “nimble” is the keyword to success.  Ron’s excellent Movie for the High Growth Stock Newsletter this past weekend showed you how to fish in the best Industry Groups, both on the upside and beaten down “downside”.  It goes without saying that the Energy Stocks are making hay for all of us, with the caution that one of these bright days that bubble will burst. The Coals are moving fast as are the Fertilizers, and don’t forget the Steels which have been a trifle sluggish but warming up to go again.  Add the beaten down Solars to the list with CSIQ, SOL and ESLR the hot stocks of the moment, all are tricky to play but who said it was easy in this market?

I am no bottom fisher but I say watch out as you have to be one with extreme patience and further more have your wits about you that you may end up having to dredge rather than bottom fish.  Just look at the example I covered on the Limbo Bar the other day with TKC, it would give me nightmares trying to catch the bottom on a stock like that unless you are extremely patient and wait and wait and wait.  Otherwise you will be caught knee deep in the mud.  It is trying to put in a bottom here with five days of sideways move, but Chaikin’s Money Flow says they are still selling.  It’s not difficult, and even “bottom fisher’s must be good timers and know how to play that game or else they become dredgers.”  I like the ring to that line and will keep it for our next seminar in October!

Best Regards, Ian.

Editor’s Note!  I recommend that you read the notes in the Comments section where I explain what it takes to trigger a Hinenburg Omen signal and that the recent near misses are a CAUTION that the reason for all of this is speculation on Oil coupled with the “herd is buying while the pros are selling”.

12 Responses to “The Hindenburgh Omen is back again – June 17th, 2008”

  1. Jin Says:

    So is there one more signal on 16th June as well? I check out the wsj and it shows that there is. I actually see another one on the 18th June, just wish to seek confirmation from you. Thanks

  2. ian Says:

    Well Jin: I am glad you checked with me, particularly as we all bow to the wsj for the supposed integrity of their data. Everyone in this business knows that you can check this stuff 60 ways from Sunday as the saying goes, and get 60 different answers 🙂

    I did not look at the wsj for the 16th, so I can’t help you there, but for sure we did not get such a signal as our numbers are 62 and 73 for the New Highs and New Lows for that date, so my answer is no unless you have proof that these numbers are both higher than 79, as the formula requires.

    Now we come to the 18th and my eyes popped wide as even their site shows that their numbers today are 77 and 206, respectively, so if you see a signal then please show me their data as it does not agree with what they have on their site. 77 is close but doesn’t make the grade!

    Best Regards, Ian.

  3. Theresa Hui Says:

    Hi Ian,

    First let me thank you for continuously holding our hands, especially in the current market conditions.

    I subscribe to the WSJ, both paper & on line & keep a record of the Adv/Decline, NH & NL #’s for NYSE & NDZ. FYI, my records shows that for June 16, 2008, NH was 80; NL was 78.

    The real reason I am writing you is to ask for a clarification on the Hinderburg views. After undating just now, I notice that per the “Hinderburg, Eureka, Bingo, Bongo & HHL Line” view (for NYSE) there is no HO. Yet per the “Hindenburg, NYSE NH, NL” view, there is HO. Which is “correct”? I’d assume both views draw the same conclusion.

    Thanks & take care.

    Theresa H.

  4. Jin Says:

    Oh, I think I have made a mistake there. My bad. Because when I search for Hindenburg Omen on wikipedia, it says 75 (http://en.wikipedia.org/wiki/Hindenburg_Omen).

    Total number of issues stand at 3231 according to wsj (yahoo shows 3433), but take 2.2% of both numbers, you get 71 and 76 respectively. Just wish to clarify with you about this.

    Also the numbers for 16th June stand at 80 and 78 for highs and lows respectively from what I see at wsj.

    Thanks for your reply anyway.

  5. Theresa Hui Says:

    Hi Ian,

    Please disregard my orinigal question. I can see this mornning the 2nd view I mentioned is on a weekly basis as oppsed to daily. Sorry to have bothered you.

    this teaches me NOT to do my TA past midnight!

    Thanks again.

    Theresa H.

  6. ian Says:

    Hi Theresa and Jin: Thank you both for your replies. That teaches me a lot. Just stare at the numbers again and you will see that on June 16th, you both confirm that the numbers were 80 and 78, which as you see is within a hair’s breadth of meeting the “79” requirement. Since this “good stuff” has been back engineered many moons ago it seems apparent that it was chosen to allow only a few cases to pass the test. In other words the action of the last few days can be chalked up as “near misses”.

    Remember also that the requirements need the 10 week Moving Average to be going up while the McClellan Oscillator is negative on the day of the trigger, so it takes an unusual set of circumstances to set a Hindenburg Omen signal.

    But, Theresa whom I know personally and Jin who resides many miles away in Singapore, the more important point I take away from all of this is that the spirit of the formula is being met and that one should be very cautious at this time. It suggests to me that the most important factor of indicating that the “herd is buying while the pros are selling” is underway. Then ask yourself what is the recent cause and to my mind the answer is the SPECULATION in the Oil Stocks. Be very careful as you tiptoe through the tulips and the minefields.

    Best Regards, Ian.

  7. Kevin Berry Says:

    Hi Ian

    This article http://www.safehaven.com/article-10678.htm says that there have been six Hindenburg Omen signals since early June – you’ve only mentioned one. I think you are using an extra condition (79+ highs/lows) but even so there would still be five. Would you agree?

    Many thanks,
    Kevin

  8. ian Says:

    Hi Kevin: Robert McHugh has become the “official guru” of the Hindenburg Omen, so if he says so and you like what it says, so be it. I haven’t had time to study all the points he makes, but I did notice one important new wrinkle that he seems to have included which the old masters of the game did not. Here it is:

    “That the NYSE 10 Week Moving Average is also Rising, which we consider met if it is higher than the level 10 weeks earlier (condition # 2), and that the McClellan Oscillator is negative on that same day (condition # 3).”

    The change I feel he has made is “which we consider met if it is higher than the level 10 weeks earlier”. I do not pretend to have studied that wrinkle as I am responding immediately, but I believe the original intent was to have the Hindenburg Omen be a rare event that occurred towards the top of a rally and not when the market has already corrected the best part of 20%, which implies we are already at the door of a Bear Market, 7 or 8 months later.

    Net-net, I believe it is far better to have the HO signal an overbought market which is peaking or has just peaked as opposed to an overbought AND oversold market, which I presume occurs when you apply the wrinkle I mentioned above.

    It’s the best I can do in explaining why there are so many new signals which are really depicting oversold conditions which we are well aware of using the Bingo signal. Do you agree with my explanation, and if so my concern?

    Best regards, Ian.

  9. Kevin Berry Says:

    Hi Ian

    Thanks for your reply. I agree absolutely that the principle of the Hindenburg Omen should be an uncommon event which highlights potential impending crashes, and therefore would generally apply to overbought situations. It may be that the slight rule difference about the 10-week moving average would result in the extra signals Robert McHugh cites, but I’m not sure that it would. It specifies that the 10-week MA must be higher than 10 weeks ago, in which case it must have risen since then, although it may be falling now (whereas in your conditions it is stipulated that the MA must be rising at the time of the signal). So there is a slight difference here, but I am not sure that it would pick oversold conditions, though it may result in some different signals.

    Kevin

  10. ian Says:

    Hi Kevin: Thank you for your feedback and that you agree that the HO would generally apply to overbought situations. Your note made me dig a bit further and I found a pdf file written by Kennedy Gammage on September 6th, 2005 titled “The Hindenburg Omen – A Potential Stock Market Crash Signal”.

    I offer you three excerpts which may shed some more light on the intent of what they came up with as the originators of that signal:

    “Jim warned us that a Hindenburg Omen is only occurring when the 10-week moving average of the NYSE Composite Index, based upon a weekly Friday close, is in a rising trend. If the NYSE Composite 10-week moving average Friday close is down, the signal is invalid.”

    Further down on his note he says:

    “Fourth, check that the NYSE 10 week moving average is rising.”

    Yet again, further down his note he again re-iterates:

    “If the 10 week NYSE moving average is also rising, and the McClellan Oscillator is also negative, then a Hindenburg Omen SELL signal has been generated.”

    On a different point, but equally significant he says:

    “One final note: Do not rely on YAHOO! Or other electronic New High – New Low figures, which are frequently off. Use the later newspaper figures to be accurate –
    and double-check those, as well!”

    I have mentioned before that unfortunately these numbers vary all over the lot, so if the numbers are very close to “79” one can have spurious results.

    I hope that helps clarify the differences between what Jim Miekka intended and how Robert McHugh has interpreted it, but of course I cannot speak for him, nor do I want to get into an argument of who is right or who is wrong. I am just trying to shed light on possible differences in results.

    With regard to your last point of picking oversold conditions, since the last signal was evidently on the 30th June, I feel that in most people’s book it was signaling an oversold condition.

    Best Regards, Ian.

  11. Marc Says:

    It’s real simple. We are headed to the 2005 levels and all the gains that the financials and housing created are going to melt.

    The weekly and monthly charts are clear and the pumpers have no legs. This market is not coming back until every rotten financial has failed or restructured. The only thing that the stock bulls can now hope for is the crash of oil and it needs to be well under 90 per barrel to not have a detrimental effect on the world economy. Over 100 just won’t cut it. Short every news pump and use every bounce as a sell opportunity until the hourly charts reverse. SPX will be lucky to see 1288 again anytime soon but if it does that will be another sell opportunity. See you at 1212 and then 1170’s

  12. Kevin Berry Says:

    Ian

    I think you are right that Robert McHugh’s interpretation of the 10-week MA is not what was originally stated, based on those excerpts you quoted. Those clearly indicate the condition is that the 10-week MA line should be rising at the time, not simply higher than 10 weeks ago, which is Robert McHugh’s interpretation and which apparently results in extra signals, though these should be considered invalid.

    Many thanks for pointing out those excerpts, as they make the conditions much more clear.

    Kevin

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