Ian Woodward's Investing Blog

Hindenburg Omen (HO) – Commentary

My thanks to all of you who visit my blog faithfully as well as the recent major surge relating to my last Blog Note published yesterday.

I urge you to read the “Comments” already posted at the bottom of that last Blog to get additional summary information on past sightings going back some 12 years.  Please understand that the recent excitement on the HO Signal that supposedly occurred on August 12th, is one of only two that did so with the 50-dma BELOW the 200-dma, and on this occasion at a level of 260 points…well below.   This is approximately 4% and very different from the single other occasion back in March 26, 2002 where the difference was a paltry 40 points below.  As we would expect, all the other signals occurred with the 50-dma above the 200-dma, since the Hindenburg Omen is expected to occur at Market Tops and not after the Market has just come out of an ~17% correction just five weeks ago.

This morning I had a conversation with Kevin Edgeley who is an AAPTA member in London, who gives a possible reason for the occurence, and with his permission  I offer you his note to me and my response for your perusal:

Ian,

Please excuse the direct mailing;  I was given your e-mail by Ron Brown – a fellow AAPTA member.  There has been a fair amount of talk about the HO yesterday.  Could I clarify one thing?  Do you recommend looking only at 52 week highs and lows in the NYA composite (common stocks) rather then the full NYSE listing of over 3000?  It seems illogical to me to use the full listing when this incorporates bond funds and inverse index ETFs?  The full listing seems to show an HO while the common stock NYA doesn’t.

Thanks a lot

Kevin

Hi Kevin:  You are most welcome…feel free to get in touch at any time.  I have the exact same feelings as you do, and I think you have hit the nail on the head.  Like everything else, with the passage of time circumstances change which can upset the apple cart of the good work by reputable people 30 years ago under a different set of conditions. 

Only yesterday, I was discussing with Ron, my partner and good friend of over 12 years that the recent heavy activity in Bond Funds may be “skewing data” regarding a totally different subject.  Add ETFs, Inverse ETFs and the recent new invention of HFTs (High Frequency Traders) to the equation and one can quickly see there is room for error in what was and is a highly reliable set of conditions.  Set that aside for a moment, and even the very data currently used is different from different source data vendors.

 It doesn’t take much imagination to see that the very numbers used to trigger the HO were back engineered to make sure that the triggers were rare and meant to catch Irrational Exuberance by the masses at Market Tops.  It so happens that the concept of working with the extremes of the Normal Distribution is common to my own work, and I latched onto it when I understood the great work of my neighbor, John Bollinger, with his discussion of “Fat Tails” related to his Bollinger Bands.

As I mentioned in my Blog, it seemed extremely unusual to me that we would be triggering a HO after coming out of a ~17% correction, and especially when the 50-dma is well below the 200-dma, i.e., a very weak condition as compared to most of the other occasions.  I refer you to the comments section of the previous blog where I explain in some detail the past history, and although Blaine was quick to point out that the stage in the market is very similar now to 2002, we must be careful as we watch events unfold going forward.   

I am not for one moment “pooh-poohing” (downplaying) what to me was an extremely valuable call back in 2007 for our clientele as witnessed on my Blog (where HO signals came in clumps at Market Tops).  I happen to know the integrity and outstanding contributions of Norman Fosback whose original work helped Kennedy Gammage and other well known contributors in the industry produce what was a cast-iron set of conditions that in essence identified when the Herd was euphoric at tops and the clever professionals were liquidating and getting out of the game before a potential precipitous fall in the market. 

 However, the very name has now come to be a paradise for fear mongering and one only has to look at what has transpired overnight across continents and the entire buzz on this subject to understand what this day and age of the Internet and 24/7 hour reporting can do for the stock market.  The last time my blog had so many hits was when I wrote a tongue in cheek note on the 401-K giving way to the 401-Keg!  I’ll gladly take the exposure in payment for all the times I never even get a thank you, which I know comes with the territory.

By the way, it is a long time since I was in Berkley Square, but your Nightingale sure sang well on this subject today.  I enjoyed talking with you.  We need inquiring minds like yours to understand the differences.

Best Regards, Ian.

One Response to “Hindenburg Omen (HO) – Commentary”

  1. Charlie Willey Says:

    Ian –

    Thanks for the comments. Clearer messages than this are seldom seen in the investment industry. We all appreciate your attempts to clear the muddy waters.

    – Charlie

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Disclaimer: Commentaries on this Blog are not to be construed as recommendations to buy or sell the market and/or specific securites. The consumer of the information is responsible for their own investment decisions.