Unconfirmed Hindenburg Omen on Friday, April 7th, 2006

[Jasper]

An Unconfirmed Hindenburg Omen Occurred Friday, April 7th, 2006
by Robert McHugh

"On Friday, April 7th, 2006 we received an "unconfirmed" Hindenburg Omen. Unconfirmed means it needs at least one more occurrence within the next 36 calendar days for the historic probabilities to apply to the markets now. The last "confirmed" Hindenburg Omen came on September 21st, 2005. A "confirmed" H.O. means that, based upon historical data going back to 1985, there is a 26.1 percent chance of a 15 percent or greater stock market decline within the next four months - probably sooner. . . ."

Continued at: http://www.safehaven.com/article-4937.htm

[FoundingFathers]

Monday's market action turned this into a

Confirmed Hindenburg Omen.


Odds of a SM crash over next few months - 26%

Odd of at least a significant correction - over 75%


BTW,


Richard Russell's PTI (Primary Trend Indicator) just turned negative on the SM as of today's action.

[lhslancers]

McPugh has had about five Hindenberg Omens from 1180 SP on up to 1316.

[TheKingsSon]

Ever heard of the osgood senario? There was one 2weeks, 3 day, 14 hours, 16 minutes and 36 seconds since this post.
This the 4th one this year and according to golbert & Sons LTD from London there is a 15.5% chance stocks will plummit 17.6% and the S&P will drop 36%, unless the Dow closes up before the next osgood senario and then there's a 29.3% chance that proceeds from the AMEX stocks will overtake the miners and rocket past the expenditures from all the short positions. Keep in mind that the osgood senario has never really happened to frutition (25 in a year) and all this speculation has a 79.2% of not happening at all.
Albeit, silver and Gold are up. That's good :D

[FoundingFathers]

Originally Posted by lhslancers

McPugh has had about five Hindenberg Omens from 1180 SP on up to 1316.

not true...

So to recap, we have an unconfirmed Hindenburg Omen if the first four conditions are met, but the fifth is not - in other words we only have one signal within a 36 day period. Once a second or more Omen occurs, we then have a confirmed Hindenburg Omen signal with substantially higher odds that a subsequent stock market plunge is coming.

Our research noted that plunges can occur as soon as the next day, or as far into the future as four months. In either case, the warning is useful. It just means, if you want to play the short side after a confirmed signal, or move out of harms way, you must be prepared to see it happen as soon as the next day, or four months from now, possibly after you forgot about it. About half occurred within 41 days.

Based upon the five parameters noted above, here's what we found: Confirmed Hindenburg Omens are very rare. Excluding the unconfirmed Hindenburg Omen we have now, April 7th, 2006, there were only 23 confirmed Hindenburg Omen signals over the past 21 years. This is amazing when you consider that during that time span, there were roughly 5,250 trading days. Of those 5,250 trading days where it was possible to generate a Hindenburg Omen, only 166 (3.2 percent) generated one, clustering into 23 confirmed stock market crash signals.

If we define a crash as a 15% decline, of the 23 confirmed Hindenburg Omen signals, six (26.1 percent ) were followed by financial system threatening, life-as-we-know-it threatening stock market crashes. Three (13.0 percent) more were followed by stock market selling panics (10% to 14.9% declines). Three more (13.0 percent) resulted in sharp declines (8% to 9.9% drops). Five (21.7 percent) were followed by meaningful declines (5% to 7.9%), four (17.4 percent) saw mild declines (2.0%to 4.9%), and two (8.6 percent) were failures, with subsequent declines of 2.0% or less. Put another way, there is a greater than 25 percent probability that a stock market crash - the big one - will occur after we get a confirmed (more than one in a cluster) Hindenburg Omen. There is a 39 percent probability that at least a panic or crash sell-off will occur. There is a 52 percent probability that a sharp decline greater than 8.0 % will occur, and there is a 73.8 percent probability that a stock market decline of at least 5 percent will occur. Only one out of roughly 11.5 times will this signal fail. All the biggies over the past 21 years were identified by this signal (as defined with our five conditions). It was present and accounted for a few weeks before the stock market crash of 1987, was there three trading days before the mini crash panic of October 1989, showed up at the start of the 1990 recession, warned about trouble a few weeks prior to the L.T.C.M and Asian crises of 1998, announced that all was not right with the world after Y2K, telling us early 2000 was going to see a precipitous decline. The Hindenburg Omen gave us a three month heads-up on 9/11, and told us we would see panic selling into an October 2002 low. And now we have an unconfirmed Hindenburg Omen signal, here at the start of the "bad" six months of the year, from mid-April through October, waiting for one more signal to join it.

Here's the data:

Date of first
Hindenburg
Omen Signal # of Signals
In Cluster DJIA
Subsequent
% Decline Time Until
Decline
Bottomed

9/21/2005 (1) 5 2.2% 22 days
4/13/2004 (2) 5 5.4% 30 days
6/20/2002 5 15.8% 30 days
23.9% 112 days
6/20/2001 2 25.5% 93 days
3/12/2001 4 11.4% 11 days
9/15/2000 9 12.4% 33 days
7/26/2000 3 9.0% 83 days
1/24/2000 6 16.4% 44 days
6/15/1999 2 6.7% 122 days
12/22/1998 (3) 2 0.2% 1 day
7/21/1998 (4) 1 19.7% 41 days
12/11/1997 11 5.8% 32 days
6/12/1996 3 8.8% 34 days
10/09/1995 6 1.7% 1 day
9/19/1994 7 8.2% 65 days
1/25/1994 14 9.6% 69 days
11/03/1993 3 2.1% 2 days
12/02/1991 9 3.5% 7 days
6/27/1990 17 16.3% 91 days
11/01/1989 36 5.0% 91 days
10/11/1989 2 10.0% 5 days
9/14/1987 5 38.2% 36 days
7/14/1986 9 3.6% 21 days

(1) In September 2005, the Fed pumped $148 billion in liquidity from the first week in September, just before the Hindenburg Omens were generated - to the third week of October, an 11 percent annual rate of growth in M-3 (2.5 times the rate of GDP growth and 5 times the reported inflation rate), to stave off a crash. The liquidity held the market to a 2.2 percent decline from the initiation of the signal.

(2) In April 2004, the Fed pumped $155 billion in liquidity from the last week in April - right after the Hindenburg Omens were generated - to the third week of May, a 22 percent annual rate of growth in M-3, to stave off a crash. Even with the liquidity, the market still fell 5.0 percent.

(3) The 12/23/1998 signal barely qualified, as the McClellan Oscillator was barely negative at -9, and New Highs were nearly double New Lows. Had this weak signal not occurred, condition # 5 would not have been met. This skin-of-the-teeth confirmation may be why it failed. It says something for having multiple, strong confirming signals.

(4) This signal came close to having two confirming signals, which may be why as a non-cluster signal, it produced a strong sell-off.

Another point to make here is that the actual stock market declines are often greater than the measures in the prior data chart. That's because oftentimes the decline from a top has already occurred before the Hindenburg Omens have been generated. These percent declines are only measuring the declines from the first Omen in a cluster. If we measured declines from the tops, it would be worse in many cases. For example, the September 2005 signals came after the September 12th high of 10,701. The autumn decline of 2005 into October 13th, 2005 bottom ended up being 545 points (5 percent) even with all the liquidity pumping by the Fed.

Another observation is that once you get two solid Hindenburg Omens in a cluster, the probability of a severe decline does not seem to increase as more Omens occur within the cluster. Sometimes a two signal cluster produced a worse decline than a 5, 11, or 17 signal cluster. But what can be said about multiple signal clusters is that the warnings are being given further out in time, keeping us on the alert, extending the risk period. More signals also assures us a greater likelihood of better quality signals, which seems to matter. Multiple signals are telling us things are not getting better, that something continues to remain wrong with the markets.

What does it mean for traders and investors when we get a confirmed Hindenburg Omen? This is really important to understand. A confirmed Hindenburg Omen is not a guarantee of a stock market crash. The odds of a crash based upon the history since 1985 is 26.1 percent. That means the odds we will not have a crash are quite high, at 73.9 percent. However, since a stock market crash is akin to economic death in many circles, you can look at the situation like this. If you were hearing from your doctor that the surgery you are contemplating stands a 26.1 percent of causing your death, that becomes a very high percentage probability - one you likely do not want to take if the surgery is not absolutely necessary. A 26.1 percent probability of a stock market crash is extremely high when you consider that there have been only half a dozen crashes over the past twenty years, and the normal odds of a crash happening randomly are only about one-tenth of one percent. You now also have to factor that the Fed is pumping liquidity to prevent crashes once these signals occur. And now they have hidden M-3 so we cannot even monitor how much liquidity they are supplying to the Plunge Protection Team. So you do not want to go short the farm. You may want to think about taking prudent precautionary action according to your investment advisor given the much higher-than-normal odds of a crash. That may not mean shorting. It may mean increasing cash positions or hitting the sidelines for a while. Or it may mean a carefully constructed shorting strategy developed with your advisor, that limits losses, and invests only the amount which you can afford to lose. Still, it is interesting that even with the heavy liquidity the Fed has been pumping around the time of the past three signals, the odds of a 5 percent decline or more remain pretty high at 73.8 percent.

[lhslancers]

I stand corrected. I knew you would stick up for a guy on the Main Line.

[LikeGreen]

"So you do not want to go short the farm. You may want to think about taking prudent precautionary action according to your investment advisor given the much higher-than-normal odds of a crash. That may not mean shorting. It may mean increasing cash positions or hitting the sidelines for a while. Or it may mean a carefully constructed shorting strategy developed with your advisor, that limits losses, and invests only the amount which you can afford to lose. Still, it is interesting that even with the heavy liquidity the Fed has been pumping around the time of the past three signals, the odds of a 5 percent decline or more remain pretty high at 73.8 percent."



Or it might mean laying in some cheap puts against the broad indexes?



LikeABrokenRecord :cool1: