Ian Woodward's Investing Blog

The Hindenburg Omen gave us early warning and signaled three times this past week before the market tumbled.  Chalk one up to the HGSI Software! The Dow Jones, the main US share index, saw shares plummet more than 366 points on Friday, October 19^th, amid concerns over the state of the US economy. The technology-laden Nasdaq fell 74.15 points or 2.65% to 2,725.16, while the broad-market Standard & Poor’s 500 index declined 39.45 points 2.56% to 1,500.63.  Of course, the media repeatedly reminded us that this was the 20^th. Anniversary of the 1987 crash and of course such fear-mongering feeds on itself and supposedly is newsworthy!

The benchmark index of blue-chip stocks shed 366.94 points or 2.64% at 13,522.02 by Friday’s close of trade. The slump followed a warning by Caterpillar that the housing slowdown would harm the wider economy and cut its profit forecast.  It saw its shares down 5.3% to $73.57, and predicted weakness ahead after its earnings results, which missed forecasts.   

Although the name “Hindenburg Omen” conjures up images of gloom and doom, we must understand that need not necessarily be the case.  I prefer to look at it as a sign that the market is topping or has topped and we are due for some form of correction. Consider the following: 

“The probability of an S&P 500 move greater than 5% to the downside after a confirmed Hindenburg Omen within the next 41 days after its occurrence is 77%, the probability of a panic sellout is 41% and the probability of a real big stock market crash is 25%.The occurrence of a confirmed Hindenburg Omen does not necessarily mean that the stock market will go down. On the other hand there has never been a significant stock market decline in history that was not preceded by a confirmed Hindenburg Omen.”  

Be that as it may, the question is how severe was the damage and where do we go from here.  I strongly advise you to watch my associate, Ron Brown’s weekly free movie which you will find on this same highgrowthstock.com website. He shows the extent of the damage that has occurred and gives far better perspective than I can relate to the Internals of the Market. In my next blog before the weekend is finished I will relate this year’s action to past history in 2000 and 2001 and I will then wind up with a third blog of what do we do about it and what to look for. Stay tuned.

Best regards, Ian. 

This entry was posted on Saturday, October 20th, 2007 at 11:22 am and is filed under Market Analysis. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.