Ian Woodward's Investing Blog

Many Moons ago, particularly back in the time-frame of 2005 and 2007, we had plenty of Hindenburg Omen Signals and of course because of its name, everyone sits up and takes notice when these signals fire.  It’s a strong warning signal for a Market Top, and in essence what is happening is that the Herd, which is the likes of you and me, is buying while the pros are selling.

During that timeframe I was fortunate to have Wikipedia pluck one of my blog notes relating to the Hindenburg Omen’s that fired then, and so whenever there is a hint of a sighting my blog gets hits from all over the world to see what more they can glean from my notes on the subject.  I appreciate that and here is my updated discussion on the subject to bring you forward one more time on the genesis and history of the whole subject from then to now:

When the Internet goes gaga 24/7 on this good stuff,  you would naturally ask “What is all the fuss about?”  Its claim to fame is that there has never been a significant Stock Market decline in History that was NOT preceded by a confirmed Hindenburg Omen signal.  However, on the other hand, not all signals are going to turn out to be major corrections.  In fact, 75% of them are small corrections, and I will show you that in a moment.

But let me first describe what the Criteria are to trigger a Hindenburg Omen Signal of which there are five in all.  You will soon see they are cleverly selected to ensure that these signals do not fire except on rare occasions when all must be TRUE on the same day.  This is the brilliant work of Jim Miekka who was the originator of this signal and together with Kennedy Gammage came up with the name.  You can’t have a spurious single Signal for us to have a confirmed Hindenburg Omen in play.  You must have two or more, and invariably you will see there is a cluster at Market Tops.  Here they are:

Although the HGSI Hindenburg Omen Indicator has served us well over all of 10 years, times have changed and others have turned to using the ALL NYSE instead of the NYSE Composite, so Chris White, CEO of EdgeRater has worked with me to help keep you up to date.  In essence this is the major change in addition to dropping item #2, from what we see in the current literature.

This next slide is the past History from 1985 to 2005, and I have plucked out those that are above 16% which is close enough to a Bear Market Correction of 20% to be considered significant.  You will see from the list that these significant corrections amount to 25% of the time.  The remaining 75% of the occasions turned out to be essentially small with most of them single digit corrections.

So the bottom line out of all of this is to sit up and take notice when these fire and be on guard until they fizzle out which is 75% of the time…Where have you heard that swan song before?  It ties in directly with what I showed you in last month’s Newsletter and on the Blog where Market Corrections are seldom more than -8% from the high, before they find support and rally up again!

So let’s first see a couple of slides which have been plucked from past Blog Notes for the 2005 to 2008 timeframe, and then one in August 2010 which turned out to be “bogus” even though the Internet went gaga when it occurred.  The slides are self-explanatory:

Here is a Screen Shot of the Blog Note Picture I used for the “bogus” sighting back in August 12, 2010:

…And here is why; so never ever take action on a single signal, and even then reason with yourself if it even makes sense, by reviewing such other favorite indicators such as the High Jump, the Eurekas, the Phoenix’ and the Kahunas!  This next chart shows that I was correct, since it just made no sense when looking at the chart, period.  The stuff to the right was not there at the time, so it was a judgment call:

So now we fast forward to this past month, and as I say, it seems that the masses out there are now using the ALL NYSE instead of the NYSE Composite, and with all the work that we have underway in several directions to improve the presentation of the work which we have done over these past 15 years, I was fortunate enough to have Chris give me a lending hand to show how we are hearing 24/7 on the Internet about all this fru-frau of sightings.  It seems that it takes Class Stocks, Preferred Stocks, and Warrants in addition to Common Stocks to get these triggers as Chris has ably shown in the video we put together.  (See below for the link to U-Tube and how to view it without leaving this Blog)

It goes without saying that my Blog has been lit up with hits from all over the world with 50 from Australia in one day, and I certainly do not want to disappoint them when it is the hot topic of the moment.   Needless-to-say, not even a thank you except for a faithful few, but that goes with the territory.

You should immediately see the powerhouse of a job that Chris has done with just this one slide:

There you have it, all you need to know about the Hindenburg Omen but afraid to ask!

Here is the video:

With Best Wishes on Father’s Day to all my Supporters around the world.

Ian

Last week saw the Bears finally seize control and take the Market Indexes down from their Highs by ~ -4.6% only to see a rebound with the Jobs Report which has once again gained attention on the 1st Friday of the Month.  This was a significant Bounce Play that regained 2.1% on Friday and chalking up two Big Kahunas up for the DJI and NASDAQ 100 (NDX), and four Small Kahunas for the NASDAQ, S&P 500, S&P 100, and S&P 1500, respectively.   I show that picture on the last chart of this Blog Note.  So Hope Springs Eternal:

So, let’s take a look at what all the hub-bub was about.  You will recall that last year I established that 2005 was the Benchmark Year with which to measure the performance in 2013 to see if we could match or better it as a sign that the economy was at long last recovering.  Between friends, I say “so far, so good”, as we are matching the numbers by and large.  Nothing to write home about, but none-the-less this Market will latch on to any bit of reasonable news as they interpret it.  Who are we to argue, though the Bears once again find themselves running for cover:

One day does NOT a Rally make, but at least it has stopped the rot setting in for now as seen by the Bounce Back on Friday:

In our approach to Greed and Fear, the Caution Signal fired back on 5/17/2013 right on Target with the Market Top when the S&P 500 reached 12% above the 200-dma, and now the strategy is simple for both the upside and downside scenarios:

Upside:  First reach the recent high, avoid a double top and trot on up to reach the Higher Target of +16% from the 200-dma.

Downside:  Head back down to -4% from the high target with an early warning @ 1575 and then for -8% down @ 1552.

Looking at the internals, we are essentially at Stalemate with Grandma’s Pies sitting at 47%:53% above and below 0.5 %B:

When “Clancy lowered the Boom” with -3.5 Buckets down on 5/31/2013, it led to another down move before Bouncing Back:

This next spreadsheet has kept us on the right side of the market and shows where we sit as of today, which on average is down -2.5% from the recent highs achieved by the Market Indexes.  As a result of Friday’s bounce back the Bulls have a little breathing room, but this coming week will determine who has control, which has been in the Bears favor these past ten days:

…Finally, the chart that sums up the Bounce Play on Friday that gives us Hope Springs Eternal there is still more to the Rally:

Enjoy and Best Regards,

Ian.

My blog is buzzing with hits looking for fresh news of a supposed sighting of the Hindenburg Omen on May 29th, and I will have more to say on that at the end of this note.  However, for those who wish to see what I had to say on the last Blog note on this subject please try my August 12th, 2010 Blog Note together with the 5 responses at the bottom, where it turned out I was right when I headed it “The Hindenburg Omen did not Volley and Thunder”.  Select the Date from the Archives on the Right of the Opening page and scroll down to the item.  Also, if you are interested more deeply in the subject, please see:

1.  The Hindenburg Omen Signals between 2005 and 2007, written on November 6, 2007, which is also featured in Wikipedia and is the first item under “External Links” at the bottom of their write up.

2.  The Hindenburg Omen, written on September 30th, 2007 and

3.  The Hindenburg Omen Triggered Tonight written on Monday, October 15th, 2007

Sad to say we are back to “Wibbly Wobbly” times which you are now familiar with:

Here is the evidence where the Market Indexes have yo-yoed up and down these past seven trading days with four of them breaking below support as shown.  Worse yet, the last 15 minutes saw a major run for the exits:

The Russell 2000 is also showing weakness, but let’s put this in perspective as it is only down -2.4% from the high:

The High Jump for the S&P 500 signaled a “Caution” two weeks ago when it reached 12% up from the 200-dma, which suggests a Correction of some form was due soon.  However, Both Bull and Bear Scenarios are still in play at this stage since the S&P is only down -3.3% from its high posted on that blow off day on 5/22/2013:

Here is our favorite spreadsheet which after featuring it for four months has shown that the RIGHT strategy is to increase the High Jump Targets for Market Indexes in 4% increments to keep us on the right side of the Market.  Please note the two blue arrows which show the Highest reached for the Indexes and the % Down since then:

Turning our attention to the underlying texture of the S&P 1500 Market Index, here is Grandma’s Pies which now at worst is “soggy” with a double humped camel look:

…And now for our favorite view which shows that infamous 3&1/2 buckets down which immediately says the bias is downwards no matter what the Bulls say and one had better take good note of the action early next week:

Here is something new for you to stare at…it’s the XL Series Sector ETFs month by month over the past 14 years, which Bob Meagher has helped me pull together.

Now as promised let me turn my attention to the latest hub-bub on the Hindenburg Omen (HO).  As we know these occur very infrequently, but when they do in succession it has always indicated a correction to come and certainly when it appeared with such frequency as I showed back in 2007 they are invariably big.  Unfortunately, times have changed as the years have passed and the biggest change which throws the HO into a tizzy of not being as dependable is the advent of the ETFs since that great analyst Jim Miekka devised the criteria to ensure it was a very infrequent and reliable occasion.  The database used these days is so different, and certainly there have been changes suggested that hopefully keep things in balance, but its reliability is suspect.  So much so, that I offer you an excerpt that Wikepedia has included to put this in perspective:

As always, there are two schools of thought…Bulls and Bears.  There is no question that this move since November 19, 2012 has been remarkable and is my Stake in the Ground for the Base Low for this 6&1/2 month period we are in, which is long in the tooth.  Of course the high jump work that Bob Meagher and I have recently done also points to a “Caution” of us being on a correction signal.  The problem we face is twofold:

1.  Overbought can get more overbought and go higher ala 1995 with minor corrections as I have said before and

2.  Gloom and Doom sets in and the nay-sayers are quick to talk in terms of “Crash” rather than a Correction.  This is particularly true when the “Shorts” are frustrated and are repeatedly having to cover and try again.

With this dilemma in mind, and in recent work with Bob, I have confirmed my original strategy to work the problem in steps of 4% at a time.  By that I mean each High Jump and Low Jump (Limbo Bar Target) must be 4% higher or lower at a time, with worse than 12% either up or down for Danger Signals either way.

That is why you see my spreadsheet that I put on the blog is in 4% steps for High, Higher and Highest Targets.  Likewise, now that we are in “ozone territory” I am now emphasizing the Low and Lower targets of -4% and then -8% from the Recent High.  This way I let the Market tell me what it is doing rather than anticipate the moves too soon.  By all means set targets as you know I always do for High, Higher and Highest, but then let the evidence unfold to confirm the direction and your stomach guide you as to when to pull the trigger.  This is nothing new as you have been with me for over 20 years and recall the 4% steps I always use:

Minor Correction…8 to 12%

Intermediate Correction…12 to 16%

Major Correction…16% to 20%

Bear Market…>20%

However, this very unusual market has re-emphasized that these rules of thumb are golden and the High Jump has solidified all of this yet again.  You also understand that the odds that a Correction of less than -8%  is 77% and 71% is in our favor that it will turn back upwards for the S&P 500 and Nasdaq, respectively.  Anything worse than that can land anywhere, so be careful.   I leave you with the important charts for the S&P 500 and Nasdaq which support the concept that the odds are in the Bulls favor up to -8% from the high.  After that heaven help you.  I am not suggesting one waits till we are 8% down, but once the floodgates open you know your nest egg will be hit the way it was in 1987, 2000 to 2002 and the worst one of all in 2008, so do something!

Now you know all I know and hopefully we will be sitting in a better position this time next week.

Best Regards,

Ian.

It’s no news to you that we had a Climax Run blow off on 05/22/2013 when most Indexes hit new highs and then the next day we had a knee jerk down.  However as you will see, the Correction so far has been orderly and has found temporary support.  This week will be critical to determine whether we continue downwards to arrive at the first downwards target of -4% from their highs, or we find new support and press upwards to either a double top or push on through to the next target higher:

Here is the usual picture of the eight Market Indexes which show at a glance the action in unison of them:

…And here is the Russell 2000 which shows the drop of over 16 points in one day for the Knee Jerk:

My good friend Mike Scott keeps a beady eye on the McClellan Oscillator and Summation Index and sent me his usual update which he has done for over 20 years.  Here is his summary thoughts on where we stand today:

Here is the supporting evidence that the Correction has been only four days and orderly so far:

Grandma’s Pies show we are at the Crossroads:

Now that we have reached a top with regard to meeting the Highest Jump Plus Targets (except for the Nasdaq and NDX which we know have lagged all along due to the hammering AAPL took earlier and its heavy influence on these Indexes), I show the Highs reached on 5/22/2013 and the extent of the decline so far which is approximately -2% on average:

Now here are a series of charts which hopefully you will find are “Good Stuff”.  It picks up on the theme of the High Jump which clinches that plus or minus 12% from the 200-dma is the Caution Signal for the S&P 500…Enjoy:

…And here is a closer in view which shows the last 13 years.  Please note the Caution on the chart:

I felt we should turn our attention to the XL Series of ETFs and show you a snapshot of their performance over the last month.  I have indicated what I feel are the ETFs that are extended and also those that may still be playable provided the market turns upwards yet one more time:

Here is the History for the Healthcare ETF XLV, which shows this one is extended and well overbought:

…And here is a chart for the Technology ETF XLK, which may offer an opportunity if the market has more to the upside:

I trust you all had a good Memorial Day and remembered our troops in your thoughts and prayers.

Best Regards,

Ian

It has been a couple of weeks since I posted a blog note and I thank you for being patient, as I am sure you have constantly been reminded that this Continuation Rally is coming to an end.  I also remind you that as long as his nibs, Uncle Ben, keeps printing money ala Q-E 3 and doesn’t throw a monkey wrench in the pot by announcing that interest rates are about to be raised, we will continue to be confounded.   I hope you find the wait has been worthwhile as I feel I have some “good stuff” to show you in this blog note.  Give me feedback, please.

The Market Indexes are emulating 1995 when they also defied the saying “Go away in May and come back in October” , but we shall see how much longer this steady climb can continue as I see the first signs of being truly overbought and I will show you why I say that:

The RUT has just today broken through the 1000 Barrier so the beat goes on:

The VIX remains quiet despite bulletin board chatter that tries to turn the tea leaves for any sign of a change in Volatility:

…And as we would expect the Accumulation vs. Distribution Ratio continues to improve though slowly:

Likewise, Grandma’s Pies continue to rise to being overbought with a 90:10% ratio:

After the Whiplash where we suffered the 7.6 Buckets down in one day on April 15th, the %B is back to highs:

Now we are reaching for New Highs and you will be glad to see that I feel that I have broken the code for when to be really cautious based on the fresh work I have done since my last blog note, which has kept me busy to hopefully keep you on the right side of the Market.

As we can quickly see we are now reaching new highs on most Indexes and that led me to a brainwave to show the relationship between the S&P 500 and the % of the Index from the 200-dma through the period from 2008 to 2013.  Note how one can readily see that both on the High Jump and on the Limbo Bar (the downside) that the key point for CAUTION is when the % from the 200-dma is + or – 12%, respectively.  Note that the scale on the right for the % from the 200-dma is in increments of 4% and that gives us the clue for the next three charts!

As we well know, 2009 was the year we came out of the Black Swan swoon with a brand new Rally, so it is not surprising that we stayed above 12% for several months, but since then note how few times we broke above 12% for 2011, 2012 and just this past Friday in 2013.  So I say now is the time for Caution…but we need to build on this idea in the HGSI Software so that we can immediately see when we measure the degree of extension with a color coding requiring 4% increments as shown.  The whole intent is to make life easier and know when to really be uptight for potential corrections.  Hopefully the Blue arrows on this next chart should stiffen up your backbone that some form of correction is imminent whenever the % from the 200-dma gets above 12%.  Of course, it doesn’t tell us how much the correction will be, but at least the warning is consistent.

Note the color coding goes in steps of 4% and we are able to show both the High Jump and the Limbo Bar on the same chart so that we have a good feel for where the market is sitting over time.  I’m sure by now you are saying “Show me what the 2000 to 2007 period looked like before I am convinced”, so here it is.  The surprising conclusion is that the days of Wine and Roses back then was far less Volatile…you judge for yourself:

With this chart in the HGSI Software which will soon be incorporated we not only can look back in time with the S&P 500, but with any of the other Market Indexes and in a wink know when to be really cautious and when to play with impunity!

Enjoy, with best regards,

Ian.