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Weekend Stock Market Analysis

(6/8/13)

I have been asked to comment about the Hindenburg Omen Indicator since there have been some articles of late about it.   Keep in mind there are different databases out there with differing numbers so that will lead to potentially different signal dates.  The only database that is accurate in my opinion is the one from the WSJ.  In addition one can only calculate values back to 1980 since the NYSE calculated New 52 Week Highs and Lows in individual stocks differently prior to 1980.  

As for me I use the following criteria to define a Hindenburg Omen using the WSJ database.      

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).

Meanwhile one key feature many investors fail to include in their analysis 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 and June 2013.

List of Hindenburg Omen Signals since 1980 along with the Shiller PE Ratio and % above the 5 Year Low (Months when above criteria are met are highlighted in blue)

Signal	Shiller PE	% above
Dates	Ratio	5 Year Low
Jul-86	13.6	148%
Sep-87	18.3	120%
Dec-99	43.2	222%
Oct-00	41.9	150%
Sep-05	26.1	62%
Apr-06	26.3	71%
Jul-07	27.4	102%
Oct-07	26.7	100%
Dec-10	21.7	89%
Jun-13	24.0	146%

A review all of the prior Hindenburg Omen (H)) Signals when the Shiller PE Ratio was above 18 and the S&P 500 was at least 100% above its 5 Year Low follows.

The last Hindenburg Omen (HO) event occurred in the Summer and Fall of 2007.   The first HO Signal occurred in July of 2007 (point A) which was followed by an initial 12% correction.  However in this case the S&P 500 was able to rebound and make a slightly higher high three months later in October (B) which coincided with another HO Signal.  This was then followed by a sharp sell off in which the S&P 500 lost 58% of its value over the next 18 months.

The next HO event was in late 1999 and 2000.   There first HO signal occurred in December of 1999  (point C) which was followed by an initial correction of 10%.   However the S&P 500 was able to rebound and make a higher high by March of 2000 (point D).   Meanwhile a 2nd HO Signal occurred in October of 2000 (point E) which was followed by a significant sell off.  Overall the S&P 500 lost 50% of its value from March of 2000 through October of 2002.   

Finally the last HO event occurred in September of 1987 (point F) which was followed by a sharp 36% drop over a period of two months in the S&P 500.  In this case the S&P 500 peaked the month before. 

Recently another HO Signal occurred on June 3 so we shall see how this latest signal plays out.  As we saw with the HO Signals in the Summer of 2007 and back in late 1999 it's possible the S&P 500 could make a slightly higher high before a much larger correction develops in the longer term.  

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