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A New Cluster Of Hindenburg Omens Betrays The Bullish Case For Stocks

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Includes: BAPR, BAUG, BIBL, BJUL, BJUN, BOCT, CHGX, CRF, DDM, DIA, DMRL, DOG, DUSA, DXD, EDOW, EEH, EPS, EQL, EQWL, ESGL, FEX, FWDD, GSEW, HUSV, IVV, IWL, IWM, JHML, JKD, OMFS, OTPIX, PAPR, PAUG, PJAN, PJUN, PMOM, PPLC, PSQ, QID, QLD, QMJ, QQEW, QQQ, QQQE, QQXT, RSP, RVRS, RWL, RWM, RWSL, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SFY, SH, SMLL, SPDN, SPLX, SPSM, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SSPY, SYE, TNA, TQQQ, TRND, TWM, TZA, UAUG, UDOW, UDPIX, UJAN, UOCT, UPRO, URTY, USA, USMC, UWM, VFINX, VOO, VTWO, VV, ZF
by: Jesse Felder
Jesse Felder
Long/short equity, Deep Value, contrarian, momentum
Summary

While an individual signal has very little value in forecasting a stock market crash, a cluster of signals can be valuable in that it signals a pattern of dispersion that is not compatible with a healthy uptrend.

In the past, these clusters have marked important intermediate and long-term reversals.

Over the past couple of weeks, we have seen another cluster of 8 individual signals between the NYSE and Nasdaq.

I have written about the value of the Hindenburg Omen as a technical stock market signal several times over the past few years. To summarize, while an individual signal has very little value in forecasting a stock market crash, as some seem to suggest, a cluster of signals can be valuable in that it signals a pattern of dispersion that is not compatible with a healthy uptrend.

In the past, these clusters have marked important intermediate and long-term reversals. You'll notice in the chart below that at both the 2000 and 2007 stock market peaks, there were a significant number of omens triggered during both a 3-month and 12-month window. We saw something similar in mid-2015 before a pair of sharp corrections. We saw another rising pattern in early 2018 leading into the "volmageddon" selloff, and again later that year just prior to the steep fourth-quarter decline in the broad stock market.

Over the past couple of weeks, we have seen another cluster of 8 individual signals between the NYSE and Nasdaq. This takes the 3-month total back up to 16 and the 12-month total back up to 33 - levels which have proved significant over the past twenty years or so. Again, this doesn't mean stocks are going to crash; it merely suggests the current uptrend for stocks is not as healthy as the bulls should hope. Furthermore, it does increase the probability of near-term reversal for the broad indexes.

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