Just when you thought it was safe to get back into the market…
Run and hide, run and hide.
Otherwise known as the Hindenburg Omen, once this is seen, the probability of a crash occurrence is considered high.
Named after the crash of the German Zeppelin Hindenburg in 1937, here's how it works:
1) The number of new daily 52-week highs and lows on the NYSE is more than 2.2% of all securities traded that day. However, new 52-week highs cannot be more than twice the number of new 52-week lows. This condition is mandatory.
2) The 10-week moving average of the NYSE Index is rising.
3) The McClellan Oscillator, an overbought/oversold indicator, is negative.
4) And, finally, if you step on a crack on the third Thursday of a month with a full moon while looking in a northerly direction, you'll break your mother's back… (I'm kidding, of course.)
The Omen has now appeared before all major crashes, or panic events for the last 25 or so years. No panic sell off has occurred without its presence.
The latest Omen-sighting may or may not lead to a sell-off, given Fed intervention. So let's just wait and see before getting nuts, shall we?
Friday's 200-point decline wasn't comforting. But let's just wait and see.
According to Barron's, the Hindenburg Omen appeared in June 2008 when the Dow was trading at 11800 - three months before the big September crash.
In 2010, according to The Wall Street Journal:
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. Other criteria include a rising 10-week moving average for NYSE and a negative McClellan Oscillator, a technical indicator that measures market fluctuations.
As you can see, the Dow - for example - did turn down after the August 2010 sighting. The only reason we bounced was because of Bernanke's QE2 announcement.
We got a second sighting of the dreaded Omen on December 14, 2010.
By April 2011, the market crashed. Omen-related or not, the crash was still significant. The only reason we bounced so well was because of Operation Twist - a policy involving selling $400 billion worth of short-term Treasuries in exchange for longer-term bonds.
By July 2012, we got another sighting right before a brief dip. Again, we were saved by Fed intervention.
Would it be so bad if we sold off in the next few weeks? Nope. We need a healthy pullback. This rally is wildly over-extended on Fed actions.