The Hindenburg Omen, Investor Sentiment and Market Outlook

| About: SPDR S&P (SPY)
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The stock market has certainly bounced around over the past few years. With the ups and downs we have seen during this market cycle, here is a recap to help us keep track of the recent large moves in the stock market.

  • After reaching new highs above 1500 on the S&P 500 (S&P) in the autumn of 2007, the current credit crisis set in.
  • Stocks declined slowly and steadily during 2008, to around 1200 on the S&P at September 2008.
  • A sharp decline during October and November 2008 dragged the S&P all the way down to the 750-800 level.
  • Another sharp decline in the spring of 2009 briefly had the S&P below 700.
  • Since the lows in March 2009 of around 680, the S&P has rallied steadily over the past 1.5 years, to recent highs of around 1200 and current levels of around 1050-1100.

We have certainly had a lot of ups and downs over the past three years!

Hindenburg Omen

Recent market action has led to talk about the Hindenburg Omen, a stock market indicator, being triggered. The Hindenburg Omen has gotten a fair amount of press. Several friends and acquaintances mentioned the Hindenburg Omen and wanted to get my thoughts. Here is a recent article.

Interestingly, even within the articles, there are several statistics that state that the indicator, while scary, also gives false signals (as does every trading system). In particular, quotes analysts who say that only 25% of Hindenburg signals resulted in declines that can be considered crashes.

Other analysts use smaller filters and report varying levels of “forward information” for this indicator. Overall, the Hindenburg Omen DOES signify higher risk ahead, but investors should be aware that there are also some false signals.

Based on how the indicator is computed, there DOES currently seem to be:

  • A lot of undecided action (high level of new highs and new lows), combined with,
  • Divergences and negative market action – (generally rising market, negative McClellan Oscillator, and a suddenly declining market).

Wall of Worry and Investor Sentiment

Indicators like the Hindenburg Omen and the bearish environment make me think of the “Wall of Worry” – that may allow the markets to continue to climb. That is, contrarian investors believe that markets can continue to climb if there is a lot of pessimism out there. Thus, there is a commonly-used phrase, “climbing the Wall of Worry.”

Indeed, one Investors’ Sentiment indicator (see here) is flashing the highest bearish readings it has ever recorded, “far greater than back in February 2009, just before the market bottomed.”

Stock Market Indicators

My articles and research discuss a variety of investment ideas (including asset allocation, alternative investments, and diversification) and my blog focuses on proprietary stock market indicators. Every market and trading strategy has its ups and downs, and this is why we regularly stress diversification and risk management.

I post to the blog about every week or two and always update the blog with a change in long-term or intermediate-term stock signals.

Currently, the long-term stock market indicators are cautious (neutral). Intermediate-term indicators are currently bullish, calling the market “oversold.” However, a “look-ahead” shows that unless the market shows some strength soon, the long-term indicators may turn bearish. These signals are based on several technically-based market action indicators and have proven to add value over many market cycles. Stay tuned.

Good luck!

Disclosure: Moderately long stocks