The Dow Jones Industrial Average Makes New All Time Highs: Is The Bull Market Resuscitated?
On Friday, September 21st, the Dow Jones Industrial Average set new all-time highs. That same day, the Nasdaq 100, Standard & Poor’s 500, and the Russell 2000 recorded losses. The fractured and non-uniform nature of the markets continues in plain view.
Hindenburg Omen expert Robert McHugh who publishes https://www.technicalindicatorindex.com/, in a recent email told subscribers the following: “The stock market generated a 16th Hindenburg Omen observation for the official H.O. signal from August 14th, 2018 on Friday, September 21st, but most unusual, we got the 14th H.O. observation in a row, 14 consecutive days. The Hindenburg Omen identifies times when the stock market is vulnerable to a plunge. There has not been a stock market crash without an H.O. on the clock. An H.O. signal has a warning life of up to 4 months. There was an H.O. on the clock September 14th, 1987 which led to the 1987 stock market crash. There was an H.O. on the clock from June 20th, 2001, which led to the 9/11 (sic) stock market crash. There was an H.O. on the clock from June 6th, 2008 which led to the stock market crash in September 2008. There was an H.O. on the clock from July 22nd, 2015 which led to the stock market plunge of August 2015. The January 29th, 2018 H.O. was followed by a 10 percent plunge in early February 2018. While seeing an H.O. indicator on the clock is not a guarantee of a coming crash or plunge, there have not been any crashes without one on the clock. So, having one in play does increase the risk to being long the stock market. There have been no H.O.’s with 14 observations in a row since we started tracking them from 1986. That makes this one unique. Not sure if it adds more to the probability of a coming crash, but it does put an exclamation point on the fragility of the stock market at this time, and its susceptibility to a plunge should a black swan event occur. It does have us sitting up and taking notice for sure“.
McHugh’s elaboration on the HO is valuable. While a HO does not guarantee a crash, no crash has occurred without one!
More detail on the calculation and significance of the Hindenburg Omen, can be found here: https://markonomics101.com/2018/03/15/hindenburg-omen-all-over-the-financial-press/. It is very difficult to speculate what such a large number of readings, clustered in a short period of time, will foretell but there is a high probability it will be BEARISH.
Nonetheless, the charts of key indexes, other than the Dow, are far from impressive. All six shown below are in Ascending Wedges, and are tracing out Reverse Wave Tops against a backdrop of rising interest rates https://markonomics101.com/2018/09/20/the-interest-rate-bomb-is-the-fuse-now-lit/. The complacency among investors as demonstrated by very low Volatility Index or VIX readings is the perfect setup for a huge downside surprise https://markonomics101.com/2018/09/22/mr-market-and-ultra-high-risk-for-equities/.
The Nasdaq 100 appears to be the first major equity index to violate its Ascending Wedge, while The Russell 2000 and the Value Line Geometric Index are struggling to remain above the lower bounds of their formations. The Dow, S & P 500, and the New York Composite are at or above the top boundaries of their Patterns.
Edward Yardeni https://www.yardeni.com/pub/stmkteqmardebt.pdf has calculated the amount of borrowed money that is propelling the stock markets to new highs. From his research, the correlation between the levels of borrowing and the markets is uncanny. Investor borrowing appears to be one of the single most important factors in propelling stock prices. Borrowing is easy at 3% and the perception of mitigated risk only creates Ultra-High Risk. The chart below is from Advisor Perspectives https://www.advisorperspectives.com/dshort/updates/2018/08/20/margin-debt-and-the-market
The new all-time highs recorded by the Dow Jones Industrial Average not only reduce the perception of risk as the Volatility Index falls, but they take attention away from the sectors that are beginning to weaken. Investors need to remain wary, remind themselves that RISK increases as markets go higher, and remain prudent through what is shaping up to be very turbulent times.
Borrowed money is the first to be unwound as a market goes down and magnifies the price movements. The term “Margin call” refers to when a customer’s account has lost value so quickly then the Brokerage Firm unwinds open trades before the account has a negative value. Of course, history is full of occasions when the equity vanishes so quickly or the securities themselves are illiquid. The result is often a chain reaction of selling after selling.