Market Analysts Say: False Hindenburg Omen Signal

Way too much attention paid to the Hindenburg Omen, that this dreaded technical pattern flashed a negative signal recently in the markets, indicating a coming crash.

Supposedly two Omen signals flashed fire engine red recently.

But market analysts say that didn’t happen.

Hindenburg Omen Explained

A 50-year old financial newsletter writer, James Miekka built the Hindenburg Omen in 1995 using a calculus essentially based on Norman G. Fosback's High Low Logic Index.

It essentially looks at stocks trading at 52-week highs and lows, and more moving parts that must miraculously line up in syzygy for the Hindenburg Omen to be set alight and then blow to smithereens over the markets.

Logic being that in a healthy market, stocks either set new yearly highs or annual lows, just not both at the same time. An unhealthy market with both new highs and lows portend a “to the lifeboats, stop the market I want to get off” moment.

As if we haven’t had enough of those already.

The Omen’s Criteria

Here are the five criteria for the Omen, named after the crash of the German zeppelin in May 1937, courtesy of my Wall Street traders:

1. The daily number of new 52 week highs in stock trading and the daily number of new 52 week lows on the Big Board are both, emphasis on both, greater than or equal to 2.8% of the sum of the NYSE stocks that climb higher or drop in trading on a given day (84 stocks, NOTE THAT, STOCKS).

2. That the NYSE index is greater in value that it was in trading 50 trading days prior. Initially a rising 10 week moving average was used, but it was ditched for 50 to be more current.

3. That the McClellan Oscillator is negative on that same day. The Oscillator is a market breadth signal used to ascertain the growth rate of money coming in or exiting the market—it indicates an overbought or oversold condition.

4. The new 52 week highs can’t be more than double the new 52 week lows (however, it is ok for the new lows to be more than twice the new Highs). This condition is absolutely mandatory.

The Omen Was Not Triggered

Never mind that the Omen is not right 10% of the time, only a quarter of the time.

The Omen wasn’t triggered, say my Wall Street quant sources.

When you look at the trades that supposedly hit the news highs and lows, they were not stocks.

Instead, “the vast majority of ‘stocks’ making new highs were interest sensitive closed-end funds, preferred stocks, or some other kind of fixed income product, which by my pencil are not stocks,” says Raymond James managing director Jeffrey Saut. “Therefore I’ll say the same thing I said two weeks ago, I don’t think a Hindenburg Omen has been registered; and even if it has, its track record is spotty.”

Bullish Signals?

Saut says instead that a bullish signal took place. If you really want to get technical, read this.

“What largely went unnoticed, however, was the Demark buy signal (see below) that was recorded by the SPX late last week. In addition to the Demark signal, there are some other potentially encouraging developments,” Saut says. “The McClellan Oscillator is approaching the oversold level of late June, ditto the Capitulation Index, the SPX closed at the low-end of the Bollinger Bands that have contained decline for over a year, the NFIB Hiring Plans Index just went into positive territory, and investors’ sentiment is bloody awful (read that as bullish),” Saut adds. “In fact, I have not seen retail investors so unwilling to talk about stocks since the fourth quarter of 1974!”

Saut concludes: “While in my view we have not had two Hindenburg Omen “sell signals,” we have indeed experienced two 90% downside days, without a single 90% upside day, over the past two weeks.”

He says: “I think it is a mistake to get too bearish here for the aforementioned reasons. I also think it is a mistake to get too bullish. Indeed, I believe the equity markets will remain mired in the envisioned wide-swinging trading range I spoke of following the first Dow Theory ‘sell signal’ of September 1999. In such an environment, stock selection, combined with the ability to sell mistakes quickly, should be the key to portfolio outperformance. Moreover, I agree with the insightful folks at GaveKal who suggest there are reasonable investment alternatives to the sidelines.” (EMac: Emphasis

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Autopilot Thinking on the Bush Tax Cuts

 

"Tax increases are highly contractionary…The large effect stems in considerable part from a powerful negative effect of tax increases on investment...[the finding is] strongly significant..highly robust."

 

            -Christina Romer, White House chief economic adviser, David H. Romer, American Economic Review, June 2010      

 

Expiration of the Bush tax cuts will equate to $184 billion in reduced spending. If all of the Bush tax cuts expire, taxpayers would have to pay $230 billion, economic growth could be slower by five percentage points in the first half of next year, and consumers could cut as much as $184 billion out of spending, if they react quickly to the Bush tax cuts expiring.

 

          —JPMorgan Chase      

"Why would any CEO invest one penny in the US? There is not one reason based on the new rules of the game."--David Farr, CEO, Emerson Electric, quarterly conference call, May 2009

There’s a fiscal fundamentalism in DC when it comes to the economic impact of the regulatory vaporware coming out of DC, including the effect of  

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How the President Can Show Economic Leadership Now

Before we get to what I think Americans want to hear from  the President, here's what I think they are tired of hearing.

I think the American people see through the "Blame Bush for the nation's ills" routine as a stale old bumper sticker, given that President Barack Obama was elected to the US Senate in 2004, Vice President Joseph Biden has been in elected office since the Nixon era, and House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid have held elected office since the ‘80s.

I think Americans are done with elected officials such as Democratic Senator Max Baucus who admitted at a recent town hall meeting that he didn't read the health reform bill he co-authored ("I don't think you want me to waste my time to read every page of the health care bill. You know why? It's statutory language..We hire experts.")

I think Americans see through the Democrats' push to tax earners making $250,000 or more, they know that taxing these small businesses and workers won't cure the nation's $13 trillion deficit, since the US government takes in just $2.4 trillion annually in tax revenues from individuals and companies and the fiscal dipsomaniacs now in control in DC have borrowed the rest.

I think the American people know that the Congressional Budget Office estimates that killing the tax cut on the $250K+ crowd (which is middle class in many cities) would bring in  just $40 billion in annual federal tax revenues in 2011. And that  just about covers the annual $27 billion in annual Congressional pork spending and many other subsidies given to buy votes, take your pick. And that the $40 billion would cover less than a quarter of the interest on the nation's debt. If the hike on the upper bracket were made permanent, the CBO estimates $80 billion a year over a decade. But looking through the estimates, not much in the way of how upper income taxpayers have historically sheltered their income, lowering the federal take.

I think Americans see through the Democrats' argumentative, otiose stance, that "just 3% of small businesses are in the upper bracket that will be hit with higher taxes," when taxing them "just because" means taking their $40 billion  to pay for votes gained from spending on pork and subsidies, which  means those small businesses won't be able to create private sector jobs that then create solid tax revenues--not the round-tripping of government workers paying taxes on taxpayer-paid-for wages.

And that one out of every four dollars spent comes from consumers in those brackets, says Moody's economist Mark Zandi. And that when the upper brackets get taxed more, they shelter their income.

And that the President and Congress really are raising taxes on the middle class via health reform--a new 3.8% Medicare tax on investment income and an additional 0.9% Medicare tax on wages.

And that all that government spending will lead to inflation, pushing their income and capital gains into higher tax brackets, creating more tax bills because the AMT--which catches more of the middle class--and capital gains tax rates are not indexed to inflation.

I think Americans know that the full corporate tax rates when you count federal, state and local taxes are higher than many countries in Europe, including France, and that companies don't pay those taxes, workers, shareholders and customers do.

Americans know that taxing anything that moves and anything that doesn't (the estate tax) is the wrong way to go.

They know that the real problem instead is that credit ratings agencies are saying the US's reckless spending may cause it to lose its Triple-A rating because more tax revenues are going to pay just interest on the federal debt.

And that the ratings agencies don't want any government getting on the hamster wheel of borrowing, taxing, or printing money just to pay interest on the debt, interest now higher than 10% of annual tax revenues--fast approaching the breaking point for a downgrade.

Americans also know that President George W. Bush inherited a deficit, according to the CBO--not a surplus, as many erroneously suggest.

I think the American people know that fiscal stimulus quickly vanishes, that people won't make long-term decisions to buy a house or a car knowing that the artificial starch of fiscal stimulus is temporary, and that following politicians' logic on stimulus is like following someone down a highway who always has the right blinker on.

That instead the private sector delivers

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What's Really Dragging Down Home Sales

The New York Federal Reserve recently put out a report on consumer credit that shows how underwater taxpayers still are even three years into the bursting of the credit bubble.

 

And in light of the negative news on existing home sales, the report’s new findings on home equity lines of credit should be of deep concern to policymakers in Washington, DC.

 

With HELOC lines of credit still stubbornly high, how can underwater homeowners ever sell?

 

The report shows that total consumer debt was $11.7 trillion as of June 30, the latest data available. That’s 6.5% lower from the third quarter of 2008, when the bubble started to blow up.

 

Two graphs on pages four and eight in this report may really pop out at you. “That’s because they highlight how people used their home equity lines as credit cards,” says Fox News analyst James Farrell. They “cannot find buyers to liquidate their primary asset to pay off (these home equity line balances), as well as the existing mortgage except at prices which represent a fraction of what they paid at the top of the market.”

 

Farrell adds: “Investors recognize this,” which is why they “continue to represent a significant share of existing home purchases.”

 

The New York Fed’s report shows home equity lines of credit (HELOC) fell just 4.4% to $700 billion in the first quarter of 2010 from their January 2009 peak. Meanwhile, consumers had $800 billion in credit card balances outstanding, down just 6% from their peak in 2008.

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