Once a very arcane and unknown indicator, the Hindenburg Omen (HO) has now hit the big time. We've written several pieces about it. But, it's time to make a few corrections. Mea Culpa.
Stories have now appeared in the Wall St. Journal, Huffington Post, Wikipedia, the Drudge Report and even CNBC. A good deal of information presented about HO is incorrect, including some presented in Marko's Take.
Unfortunately, the lack of understanding has led to many rumors and innuendos, which is NOT an Italian suppository! Many readers have pointed out some of our incorrect conclusions, so let's take some time to review the evidence.
The Omen, named after the famous German airship in 1937 that crashed in Lakehurst, N.J., is a technical indicator that foreshadows, not just a bear market, but a stock market crash. Its creator, a blind mathematician named Jim Miekka, said his indicator is now predicting a market meltdown in September.
Mr. Miekka came up with the Omen in 1995 as a way to predict big market downturns, developing a formula that parses data like 52-week New Highs and Lows and the moving averages of the New York Stock Exchange. He said the HO's name was coined by a fellow market technician, Kennedy Gammage, when they found out the name "Titanic" already had been taken.
The confluence of data used by the Omen was officially tripped this week. There were 92 companies that hit new 52-week highs on Thursday, or 2.9% of all companies traded on the New York Stock Exchange. There were also 81 new lows, or 2.6% of the total. Each number must exceed 2.5% for the Omen to occur, according to Mr. Miekka.
The Omen was behind every market crash since 1987, but also has occurred many other times without an ensuing significant downturn. Market analysts said only about 25% of Omen appearances have led to stock market declines that can be considered crashes.
Even the experts, however, aren't in agreement. Robert McHugh believes that we have had one HO, which occurred on August 12th. He maintains that the HO is NOT confirmed. And, from McHugh's work, the trigger is 2.2% New Highs and New Lows, not the 2.5% that Miekka believes.
According to McHugh, the odds of a crash following an HO are 30%. However, no crash has occurred without the presence of an HO. Thus, a crash requires a confirmed HO, while an HO does NOT guarantee a crash. According to McHugh, there have been 27 confirmed HO's and 8 market crashes.
McHugh writes that with the Federal Reserve (FED) pumping liquidity into the financial system, the market will have a source of buoyancy. I'd like to suggest to Mr. McHugh that he obtain a subscription to Shadow Stats, and, of course, Marko's Take.
According to John Williams, M3 is declining at an historic rate. In fact, akin to that experienced during the Great Depression. For more on the powerlessness of the FED, click here: http://markostake.blogspot.com/2010/08/unusual-uncertainty-meets-qe2.html.
In addition, McHugh should review the work of Steven Puetz. According to Puetz, the planetary alignment is ideal for a crash to occur. For a review of Puetz' findings, click here: http://markostake.blogspot.com/2010/07/hindenburg-omen-confirmed-or-was-it.html.
Another expert in astro-harmonics is noted analyst Arch Crawford. Arch has been awarded many "market timer of the year" awards and he sees a crash coming.
But, there are other reasons to determine that a major decline is not far off. For one, the ominous Head and Shoulders chart pattern. The same pattern that existed just prior to the market collapse of 2008-09.
Regardless of the trajectory of the market, the one thing we must be aware of is that the odds of upside from here are extraordinarily low. The odds of a meltdown are pretty damn high. I wouldn't be standing on the train tracks with a loud "toot toot" getting closer every second.
On Sunday, August 22nd, a most Un-ominous event will be taking place. The California Wildlife Center will be sponsoring it's annual fundraiser called "The Wild Brunch: Fawntasia". For more information on purchasing tickets or donating, please click here: http://cwcthewildbrunch12.eventbrite.com/.