Weekend Market Analysis

(12/6/14)

Another Hindenburg Omen (HO) occurred this week which is the first one since December of last year.  I use the following criteria to define an (HO).

1. The daily number of NYSE new 52 week highs and the daily number of new 52 week lows are both greater than or equal to 2.5 percent of the number of issues traded that day (some use 2.2% or 2.8%).
2.  The NYSE Index is greater in value than it was 50 trading days ago (some use a 10 Week Moving Average).
3.  The McClellan Oscillator is negative on the same day.
4.  New 52 week highs cannot be more than twice the new 52 week lows (although new 52 week lows may be more than double new highs).
5.  Two Signals must occur within a period of 30 Trading Days (some use only one signal to confirm a Hindenburg Omen).

Keep in mind we can only calculate Hindenburg Omen Signals back to 1980 since the NYSE calculated New Highs and Lows differently prior to 1980.   After 1980 New Highs and Lows were based over a 52 Week Rolling Period while prior to 1980 New Highs and Lows were not based on a 52 Week Rolling Period. 

Meanwhile one key aspect that is ignored by investors when dealing with Hindenburg Omen's is whether the market is overvalued or not.   When you factor in these two additional parameters (Shiller's PE Ratio is at least "18" the prior month and the S&P 500 is 100% or more above its 5 Year Low) then the number of signals is reduced to the following time periods:  September 1987, December 1999, October 2000, July 2007, October 2007, June 2013, August 2013, December 2013 and now December 2014.

As you can see since 1980 there have only been "9" HO Signals when the Shiller PE Ratio was above 18 and the S&P 500 was at least 100% above its 5 Year Low so it has been a rare occurrence.   The prior HO Signals in 2007, 2000/1999 and 1987 were followed by substantial corrections ranging from 36% to as high as 58%.   

However the Signals in 2013 were only followed by minor corrections ranging from 5% to 7% as shown below.  Thus the question becomes what type of correction will follow this latest signal.  Will it just be a minor correction or will it turn into something larger?

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