Hindenburg Omen

By "The Greek,"

The mysterious and infamous Hindenburg Omen is signaling that the stock market might be due for one of those nasty crashes it experiences from time to time.

The Omen is a dark technical indicator of stock market strife to come. The crystal ball signaled trouble twice this past June… you remember June, the worst June in 78 years… In the last 25 years in fact, no market crash has occurred without a signal from the Omen. But, it has flashed more often than just before market nastiness, so it’s not the end-all tell-all forecaster either.

In any event, the alarm is triggered when a significant number of NYSE stocks are marking new highs and lows at the same time. I have a theory of my own for why this is relevant, and how it may interrelate with the eventual catalyst that brings about sudden market death.

"Capital, you see, is a pig, and even in tough times, it finds something to eat."

Capital, you see, is a pig, and even in tough times, it finds something to eat. When the broader market is marking new lows, why else would a significant number of stocks also reach new highs? The answer is because of capital flows.

Capital finds profit, and drives pockets of valuation bubbles, even in broad market decline. In fact, during a period of broader decline, there are fewer places to hide, so to speak, and so capital amasses atop the times’ handful of success stories. This creates an unnatural bubble in a small segment of stocks. So, I expect that when that middle class of stocks disappears, as is the case today, and capital is amassed in a few names, perhaps the market demands reversion.

Capitulation

Capitulation occurs when the broader market gives up on stocks altogether. In a scenario like that defined by the Omen, a catalyst-event could (and often does) leave money believing no equity investment were safe, leading capital out of the few inflated names that were hitting new highs. These questionably valued winners could deflate in a hurry in that case.

The newly dislocated capital flowing out of those stocks is not likely to reallocate to the already bloodied names of the street either. In fact, stubborn long-term holders of losing shares typically give in as well, and so capitulation is related with market bottoms. These exacerbated sell-offs leave stocks bone dry of capital, and almost always as cheap as they get.

We hope we have demystified the Hindenburg Omen a bit for you, and perhaps presented a reasonable case for why the dark predictor is so effective.

Article interests AMEX: DIA, AMEX: SDS, AMEX: SPY, AMEX: DOG, NYSE: NYX, Nasdaq: QQQQ, AMEX: QLD, NYSE: FNM, NYSE: FRE, NYSE: WFC, NYSE: BAC, Nasdaq: ETRUX, Nasdaq: IIRLX, Nasdaq: IIRMX, Nasdaq: IIRSX, AMEX: BJW, AMEX: REK, AMEX: MSU. Please see our disclosure at the Wall Street Greek website.