Sunday, August 22, 2010

The Hindenburg Omen

From Wiki on the Hindenburg Omen

Conclusions

From historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty days. The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%. Though the Omen does not have a 100% success rate, every NYSE crash since 1985 has been preceded by a Hindenburg Omen. Of the previous 25 confirmed signals only two (8%) have failed to predict at least mild (2.0% to 4.9%) declines.

Because of the specific and seemingly random nature of the Hindenburg Omen criteria, the phenomenon may be simply a case of overfitting. That is, by backtesting through a large data set with many different variables, correlations can be found that don't really have predictive significance. The Omen is at best an imperfect technical indicator that is a work in progress.

[edit] Recent occurrences

  • August 20, 2010: There were 3,143 NYSE issues traded, with 83 New Highs and 95 New Lows. The McClellan Oscillator was negative.
  • August 19, 2010: A first confirmation of Hindenburg Omen occurred (following the August 12, 2010 unconfirmed occurrence). That day 137 new highs and 69 new lows were recorded (2.2% of issues traded), and the new highs number was not more than double the new lows (although it was close). McClellan oscillator was negative at -83.6, and the 10 week moving average rose, which were the two remaining conditions. It should be noted that some market observers are saying that this cluster should not count as a valid signal because many of the issues hitting new lows are closed-end funds rather than ordinary stocks.
  • August 12, 2010: An unconfirmed Hindenburg Omen occurred, the first since the market lows of 2009. One nearly occurred on August 11, but only 67 stocks hit new lows, less than 2.2% of issues traded.
There have been 50 billion in 401k withdrawals in the last 16 weeks. Bankruptcy running at all time high highs. Commercial write downs are enormous, banks using voodoo accounting methods to avoid booking losses. Our debt, and world debt, at astronomical levels.

Folks this is not the time to be invested in the stock market. I believe a crash to the 6500 level is possible. If you have discretionary cash that you would not like to lose, get out now. Please.

If you wanna take a chance- index puts and shorts is the place to be. But not long. Not long anything.

While the Hindenburg Omen is not precisely perfect, would you rather run with a 77% chance or risk your wealth on a 23% chance that nothing will happen in a market that cannot go up? You should know that in May 2007, I folded up my "long tent" and parked everything in bonds. We know how that turned out.

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