Friday, August 13, 2010

The "Hindenburg Omen" - trouble ahead for Stocks?

Yesterday, the so-called "Hindenburg Omen" has triggered. This is being touted by many technical analysts as one "sure" way to foretell an impending crash, especially if it gets triggered 3 times within 30 days. 
Yesterday was the first time.
1) Myth vs. Fact
While it is in fact true that almost every major correction was preceded by the "Hindenburg Omen", not every triggering of the "Hindenburg Omen" resulted in a major correction or crash - so let us not confuse correlation with causation.

Despite its mystical and threatening name, there is nothing special or magical to this "signal" - something which is true for every system or signal.  There is no no magic crystal ball for markets, only some tools that work a bit better than others. 

The "Hindenburg Omen" - very simplified - is an indicator which measures market breadth (how many stocks within an index are rising vs. falling) and compares that to the momentum of the market.

And by using that approach it has worked quite well - more often than not, and much better than most well-paid economists or other forecasters. So let's be cautious,  watch and see if it will be triggered again over the next couple of weeks.

2) Additional Clues from Intermarket Analysis
The U.S. 10 Year Bond yield stands now at 2.7%. Prices for Treasuries and Bunds have continued to go up over the last couple of weeks, while Gold has been in a broad consolidation, and commodities started to drop together with stocks.
These are mildly deflationary signals, and we need to be careful. Investors need to adjust their positioning tactically, which is admittedly not a simple task. 

3) Bottom Line
Here at Compass Capital, we have reduced our equity exposure again when markets refused to break out from their recent range (after the FOMC announcement), but it was by far not a very easy call.

But, as liquidity remains extremely stimulative, interest rates at historical lows and corporate earnings quite good and balance sheets very strong, we believe the relative attractiveness of equities (especially when compared to the overvalued and frothy government bond market) is high.

We therefore look for a tactical opportunity to get long again.
But maybe this will require a bit of patience.


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