Today, we’re diving into a topic that has a name as ominous as its implications: The Hindenburg Omen.
The Hindenburg Omen is a widely followed macro technical indicator focusing on three key components. These components have historically signaled market tops, and in May, it flashed an initial sell signal.
First, let’s talk about the basics. While my approach isn’t purely technical, I feel that investors should have an investment process that is firmly grounded in market dynamics. One of the worst mistakes investors commit is to stay in a position even when market conditions completely change. Indicators like the Hindenburg Omen quite simply help me stay on the right side of the market!
Now, let's break down the Hindenburg Omen. This indicator tracks three components to signal a market top. First, the market needs to be in an uptrend. Second, there needs to be an expansion in both new highs and new lows. Third, market breadth must turn negative. When all three components align, it produces a positive reading, signaling a potential market top.
For instance, we had a confirmed Hindenburg Omen sell signal at the end of 2021. This was followed by significant market declines throughout 2022. Before that, we saw similar signals just before the COVID crash in early 2020 and also in mid-2019. These signals have a pretty solid track record, as they are based on patterns consistent at major market tops.
So, what are we seeing now? The first component, an uptrend, is evident as the S&P 500, Nasdaq, and other indexes have been climbing. The second component, the expansion in new highs and new lows, indicates a mix of stocks making significant moves in both directions. Some sectors like tech are hitting new highs, while others, like consumer staples and certain energy stocks, are lagging. The third component, market breadth turning negative, was recently confirmed as shown by a dip in the McClellan Oscillator.
So, what does this initial sell signal mean, and what should we look for moving into June? Firstly, we need multiple signals within one month to confirm a Hindenburg Omen sell signal. This means we need another round of these three components aligning: the rate of change must turn positive, we need to see another expansion in new highs and new lows, and the McClellan Oscillator needs to dip below zero again after briefly going positive.
Reflecting on the last five years, we've seen major market tops each summer around June to August. It’s crucial to keep an eye on these charts as we move into June. A second signal could very well indicate that we are at or near a major market top.
Stay vigilant by tracking these indicators. For more updates and detailed analyses, continue following Market Misbehavior. Stay vigilant, keep focused on improving your market awareness, and good things will come!
RR#6,
Dave
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.