Friday, August 20, 2010

This Week: Second and Third Hindenburg Omen Events

I discussed the Hindenburg Omen earlier this week and the value it has when understood in terms of the insights it provides relative to real human activity in the stock market, and in particular its value in signalling significant market instability.

The prompt for that discussion was a Hindenburg Omen event that occurred the week before. This Thursday and Friday trading activity also produced H O events. Bottom line: There is major instability in the market that could result in a crash activity at any time.

Note: Grant Miller has emailed to point out that there are two formulations of the HO  model. The original version includes a data point that requires the 10-week MA of the NYSE Comp to be rising. The revised version includes a data point for the NYSE Comp that must be above its value of 50 trading days ago (versus the weekly average in the original). In my discussions I have used the original version, since all I'm looking for is a rough indication of instability rather than an extremely sensitive indicator. Either formulation is going to signal, significant instability with deteriorating cash inflow, with extreme activity at the high and low ends of the market. The HO, as far as I am concerned, is  not going to signal anything more. Thus, any intensified sensitivity is going to be pseudo-sensitivity. If either HO goes off signalling instability, that is sufficient for me.

With three HO events within a few days of each other that is plenty of indication for me that instability exists and that the potential for major downside action is very high.

1 comment:

  1. The Hindenburg Omen is very real. it looks like the end of times. You need to have a one year supply of water, food and fuel. Larry Triesch