Last week, however, participants shunned stocks, worried about the softening economic statistics as the Philadelphia Fed report was shockingly weak, while Jobless Claims also negatively surprised. Accordingly, the S&P 500 (SPX/1071.69) failed to hold above the 38.2% Fibonacci level (~1080) I opined should hold. The failure arrived last Thursday when the SPX fell roughly 19-points and in the process knifed through the aforementioned level. The action also allegedly triggered the second âHindenburg Omenâ in the past two weeks. As a reminder, the five criteria (courtesy of Zero Hedge) of the Omen are as follows:
1) That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2% of total NYSE issues traded that day.
2) That the smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues.
3) That the New York Stock Exchange (NYSE) 10 Week moving average is rising.
4) That the McClellan Oscillator is negative on that same day.
5) That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however, it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.
The metric I keep having trouble with is the percentage of new 52-week highs and lows on the NYSE. Parsing last Thursdayâs New High/New Low list, as well as August 12thâs (the alleged other Omen signal), shows the vast majority of âstocksâ making new highs were interest sensitive closed-end funds, preferred stocks, or some other kind of fixed income product, which by my pencil are not stocks. Therefore Iâll say the same thing I said two weeks ago, âI donât think a Hindenburg Omen has been registered; and even if it has, its track record is spotty.â What largely went unnoticed, however, was the Demark âbuy signalâ that was recorded by the SPX late last week. In addition to the Demark signal, there are some other potentially encouraging developments. As stated, the McClellan Oscillator is approaching the oversold level of late June, ditto the Capitulation Index, the SPX closed at the low-end of the Bollinger Bands that have contained decline for over a year, the NFIB Hiring Plans Index just went into positive territory, and investorsâ sentiment is bloody awful (read that as bullish). In fact, I have not seen retail investors so unwilling to talk about stocks since the fourth quarter of 1974!
The call for this week: While in my view we have not had two Hindenburg Omen âsell signals,â we have indeed experienced two 90% Downside Days, without a single 90% Upside Day, over the past two weeks. Recall to qualify as a 90% Downside Day, down volume must exceed 90% of total Up-to-Down Volume, as well points lost must be greater than 90% of points gained plus points lost. Nevertheless, I think it is a mistake to get too bearish here for the aforementioned reasons. I also think it is a mistake to get too bullish. Indeed, I believe the equity markets will remain mired in the envisioned wide-swinging trading range I spoke of following the first Dow Theory âsell signalâ of September 1999. In such an environment, stock selection, combined with the ability to sell mistakes quickly, should be the key to portfolio outperformance. Moreover, I agree with the insightful folks at GaveKal who suggest there are reasonable investment alternatives to the sidelines.
Copyright (c) 2010 Raymond James
