There are two market warning signs which have just recently been triggered and which have gotten a lot of press attention due to their catchy names – the Titanic Syndrome and the Hindenburg Omen – both of which are giving a “preliminary sell signal” based on analyses of 52-week New Lows (NL) in relation to New Highs (NH) on the NYSE within a specific period of time.
So writes Tom McClellan (www.mcoscillator.com) in edited excerpts from his original article* entitled Hindenburg and Titanic, OH MY!.
[The following article is presented by Lorimer Wilson, editor of www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
McClellan goes on to say in further edited excerpts:
The Titanic Syndrome
The Titanic Syndrome was created in 1965 by the late Bill Ohama. It gives a “preliminary sell signal” anytime that the number of 52-week New Lows (NL) exceeds New Highs (NH) on the NYSE within 7 trading days before or after a major market high.
The top of the chart below shows all of the instances since 1984 of these preliminary sell signals firing off. You can see that they do tend to cluster around major tops, but they also seem to cry “wolf” a lot at other times when an uptrend continues. Ohama noticed that too, and so he added further criteria to constitute what he called “additional evidence”. He wanted to see NL exceed NH for 4 out of 5 days, plus NH declining to less than 1.5% of total issues, and finally to have the DJIA (or SP500) decline for 4 out of 5 days. We now have 2 out of those 3 criteria met, but have not seen the DJIA or SP500 drop for 4 of 5 days.
The Hindenburg Omen
In 1995, mathematician and market analyst Jim Miekka created a similarly ominous signal that came to be known as the Hindenburg Omen. It too looks at NH and NL, and was an adaptation of Gerald Appel’s “Split Market Sell Signal”. Appels signal was simply a case of seeing both NH and NL exceed 45, with no adjustment for changes in the number of issues traded. Miekka refined it by adding a few additional rules to get a more quantified signal.
Initially, Miekka set a threshold that both NH and NL had to exceed 2.2% of total NYSE issues on the same day. He later adjusted that up to 2.8% of Advances plus Declines after decimalization changed the way that issues traded, and reduced the number of unchanged issues each day. In addition, the NYSE Comp has to be above its value of 50 trading days ago, and the McClellan Oscillator has to be negative.
You may see web sites that list different criteria, based on Miekka’s earlier writings. The criteria I use are as Miekka himself reported to Greg Morris for Morris’ 2006 book, The Complete Guide to Market Breadth Indicators. Using the original 2.2% threshold, there have been 4 Hindenburg Omen signals between May 29 and June 4, 2013. Using the more up to date 2.8% threshold, there have been only 2, but that is still a significant alert to get our attention. For more on the calculations and the differences in criteria, see this 2010 article…
The logic of why it would be important to have NH and NL both at a high level at the same time is that it can be a sign of rotation of leadership, and that can be a topping indication. It does not have to be one, but it can.
Like the Titanic Syndrome, the Hindenburg Omen does give signals at some times that are not as important as others but what is important is that it has not failed to fire off a signal ahead of all of the major price declines of the past 30 years. So if one can live with a signal that cries “wolf” some of the time, then it can be a useful message to receive. It is especially useful when it gives a signal more than once within just a few days.
John Bollinger, who created Bollinger Bands, has a good way of describing both of these indications. Rather than thinking of them as “signals”, it is perhaps better to think of them as “alerts”. Each can be useful for getting one to pay more attention to bearish signs in other charts and indicators, even as one retains the knowledge that it could turn out not to lead to a big selloff every time.
The attention that each has gotten lately from the financial media is great proof that a cataclysmic sounding brand name is better for getting attention.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://pragcap.com/hindenburg-and-titanic-oh-my (© Copyright 2013 — PRAGMATIC CAPITALISM. All Rights Reserved)
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I like the usage of the word “Alerts”, because it better describes potential warnings that all investors should heed! Like the weather the market can go wild at any time but unlike the weather, the market can be gamed (unless you believe in weather modification) which can then be used to fool those market observers into making wrong decisions. I believe that we re now in a period of market modification or perhaps manipulation is a better word, by the Central Banks along with their friend the Big Banks.
I posted this yesterday but feel it is worth posting again:
The majority of the Public will soon wake up and join the rush to return to PM’s, as investors realize that they have been played by the Central Banks in the name of Fiscal Recovery (Theirs Not Ours)…
I posted this yesterday:
Beware all those that encourage you to divest your PM’s just because the Central Bankers are fiddling with the charts most use to track the relationship of PM’s to the US$.
I believe we are seeing a Global effort to drive PM’s downward so that the big Central Banks can scoop most of it up at bargain prices, so they can further promote the use of their own paper money!
The long view of PM’s is one of security, not PM bashing by those printing paper money…