Stock Market Schizophrenia.
A somewhat rare market indicator, the now almost infamous “Hindenburg Omen” (HO), has certainly surpassed its 15 minutes of fame. It’s a rather ingenious measurement of the disparity, or non-uniformity, of stocks. A healthy BULL Market is characterized by MANY NEW HIGHS and very FEW NEW LOWS. During an Inflection Process, the group making new highs begins to taper down and the group making new lows expands rapidly.
The Omen is triggered when NEW HIGHS AND NEW LOWS BOTH EXCEED 2.2% of traded issues. That is a clear sign of masked weakness and a market that is far more prone to a downside shock or crash than would be the case otherwise. For a refresher on the Hindenburg Omen, please see “Hindenburg Omen All Over The Financial Press” (https://markonomics101.com/2018/03/15/hindenburg-omen-all-over-the-financial-press/).
On his website, HO expert Robert McHugh (https://www.technicalindicatorindex.com/) says “The stock Market has Generated a 17 Observation Hindenburg Omen, potential stock market crash signal for the U.S. Stock Market. The market has triggered an H.O. observation an unprecedented 14 days in a row through Friday, September 21st! Think about that, every day for two straight weeks! What is coming?”
And, once again, the Hindenburg Omen IS ALL OVER THE FINANCIAL PRESS (https://www.bloombergquint.com/markets/2018/09/13/the-hindenburg-omen-is-stalking-near-record-u-s-stock-market#gs.Ho7jUAc.) The Omen has proven to be a necessary condition for a crash, however, its presence is not a sufficient condition. It precedes crashes with a MUCH, MUCH higher likelihood than random. Lately, it has often been a topic of much ridicule because it hasn’t been accurate in years. Several times over the last decade Hindenburg Omens have cried “wolf“.
Any stock market indicator is less likely to be effective, once it becomes known to many and is overly anticipated or discounted. The Omen has become so “dismissed” by the perma-bull financial media that its occurrence has not really created any real fear of its possible ramifications. Therefore, it’s worth looking at why the HO is coming about so often, as the market is generating so many NEW HIGHS and NEW LOWS simultaneously. We’re going to use our friends the charts to show you what a Hindenburg Omen looks like FROM WITHIN, via a discussion of a few key indices from the S&P Dow Jones Indices.
The S & P Dow Jones Indices are comprised of 147 different sectors and industries. Each of the indices is a basket, designed to accurately reflect activity within a pretty narrow business segment. As of the close of trading September 27th, the S & P Dow Jones Indices provides, comparatively, the returns for the latest day, all the way back through the last decade, for all 147 indices (https://us.spindices.com/additional-reports/all-returns/index.dot?parentIdentifier=b3a06701-8feb-4ca1-ac99-ce0d61acf409&sourceIdentifier=index-family-specialization&additionalFilterCondition=). Many of these sectors correspond to a security, such as an Exchange Traded Fund (ETF).
For example, Mr. Market has the world convinced that REAL ESTATE always goes up, so no one pays a whole lot of attention to softer prices and periods of slower sales, except the agents who are forbidden from ever telling a client that conditions are weakening. So, we’ll do the dirty work. CONDITIONS ARE WORSENING. Note the sudden break down in both the Real Estate Sector Fund (XLRE) and the Dow Jones REIT Fund (DJR). This morning’s Zero Hedge explains why, in “Housing Market Rolls Over As Home Mortgage Rates Hit Seven year High” (https://www.zerohedge.com/news/2018-09-27/us-home-mortgage-rates-hit-seven-year-high).
The Financial Sector of the Market is critical. The Broker/Dealer index (XBD) has just broken below support to turn BEARISH, while the Bank Index (BKX) is just above support. Gold and Silver miners (XAU), and many other sub-indexes of Commodities, remain at, or near, their lows.
On the flip side, Health Care related companies continue to make NEW HIGHS such as Biotechnology (BTK), Pharmaceuticals (DRG), and Health Care Select (XLV). Technology, which includes “The Four Horsemen” (https://markonomics101.com/2018/08/23/tipping-point-part-2-the-four-horsemen-of-the-nasdaq-collapse/), is made of the Technology Select Sector (XLK) and Computer Technology Index (XCI). They too are at, or near, new HIGHS.
The great disparity within the Stock Market sectors, as these two sets of charts illustrate, are creating a “Stock Market Schizophrenia” and contributing to all these Hindenburg Omens events. To investors and traders, it is treacherous to try to outguess Mr. Market. The Stock Market remains characterized by Ultra High-Risk Conditions and until it returns to uniformity (probably heading lower), it’s a pure gamble and not a particularly good one.