The Hindenburg Omen: Is A Crash Coming?

 Subscribe in a reader

In July the S&P 500 index as well as several other leading indicies, put in an important technical signal, the "Death Cross" Link. Now there are those who will debate its accuracy in the direction of the underlying index, I being one. But last Thursday, traders & investors got another key technical reading...the "Hindenburg Omen" >>LINK. Again there are those who don't give this indicator validity. However, as with any indicator, one shouldn't totally dismiss it, but rather track it along with others.
The traditional definition of a Hindenburg Omen requires that: [*charts below as of August 12th, 2010]

#1 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 percent of total NYSE issues traded that day.

     

#2 The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 69.

#3 The NYSE 10 Week moving average is rising.
#4 The McClellan Oscillator is negative on that same day.

#5 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.

These measures are calculated each evening using Wall Street Journal figures for consistency. The occurrence of all five criteria on one day is often referred to as an unconfirmed Hindenburg Omen.

A confirmed Hindenburg Omen occurs if a second (or more) Hindenburg Omen signals occur during a 36-day period from the first signal.

The Hindenburg Omen mechanism can be applied to other stock exchanges like Paris, Frankfurt, Tokyo or Sydney but the criteria for it must overall be the same.
Past performance of the Hindenburg Omen: Historal Link additional link

Short Bonds? TBT

 Subscribe in a reader

In a recent article on TheStreet.com and also in a tweet, Doug Kass, president of Seabreeze Partners is saying to short bonds as stocks begin to move towards the upper end of his range for the S&P 500, which is 1150.
He believes that by going long ProShares UltraShort 20+ Year Treasury (NYSE: TBT), this provides a better risk/reward opportunity than going long stocks. Kass has previously been bearish on the bond market as he believes that yields are way too low. However, the TBT continues to trend lower, down nearly 2% intraday today. Is it at a bottom or will investors continue to buy bonds, after all overbought can continue to stay overbought?
In the chart below looks at the TBT against the 10 year Treasury yield as well as the 30 year.Not really sure if now is the time to enter the TBT, but I respect Mr. Kass and wouldn't bet against his judgement. Definitely something to keep on the radar.

Two interesting reports to read: Doug Kass Adding To TBT LINK  Buffett's Lesson on Inflation and Bonds LINK

RIMM BlackBerry 'Torch' Goes On sale

 Subscribe in a reader

Mid-Day Chartz

 Subscribe in a reader

Chartz: Then & Now

 Subscribe in a reader
Then & Now: A look back at the charts of the Great Depression to help us predict the markets of tomorrow, with Walter Zimmermann, United-ICAP chief technical analyst.

Silver Wheaton & Silver Heading Higher Off Of Fed Decision

 Subscribe in a reader

Fed Admits Economy Slowing Down

 Subscribe in a reader

"Gradual adjustment tends to characterize periods of rate increases as well as periods of decreases....in practice the FOMC seems to take a gradualist approach....Several arguments have been made for the desirability of a gradualist approach to monetary policy." ~Gradualism~ Remarks by Governor Ben S. Bernanke at an economics luncheon co-sponsored by the Federal Reserve Bank of San Francisco (Seattle Branch) and the University of Washington, Seattle, Washington May 20, 2004  >>LINK

ITZ Intra-day Report

 Subscribe in a reader

What will the FED do? We'll know within an hour, that plus the news from China of a slowdown is weighing on the markets today.

  RIM offer to Saudis is BlackBerry 'codes'-source

Earnings Yield E/P

 Subscribe in a reader
In a follow-up to yesterday's post:
The earning’s yield (E/P) on the S&P 500 is currently 6.6%, which is the highest in 15 years, while the spread between the earning’s yield and the 30-year Treasury Bond is the widest in 30 years. Last week the S&P tested, and held, support. Meanwhile, the Transports are trying to break out to the upside. All of this should lead the equity markets higher.
Real Earnings Yield (REY) Model of the U.S. stock market, constructed by the CXO Advisory Group LLC as a potential decision aid for timing investments in equities. The REY model is kin to the Fed Model, but it uses the expected inflation rate (a wealth discount rate) rather than Treasury instrument yields (competitors to stocks) as a benchmark for the expected stock market earnings yield, defined as aggregate expected corporate operating earnings divided by stock index level.

Above chart compares the behaviors of the S&P 500 Index and the S&P 500 forward real earnings yield over the available sample period. Visual inspection suggests some tendency for the stock market to be relatively strong (weak) after the forward real earnings yield is high (low). Link to report

Itz Weekend Market Review

 Subscribe in a reader
Last week Itz posted a video of Gary Shilling making a case for deflation for the U.S. link
In the chart below, it compares the S&P 500 to the 'Rule of 20' since prior to the Depression. Rule of 20 which was used to assess PE multiples given various inflation environments, plots the sum of trailing PE multiples with yoy inflation rates. Note, that before the 1950s when PE multiples were lower. The Depression and a severe deflationary period between 1930 and 1933, and another milder one in the late 1930s, resulted in a dismal decade for corporate profits.

 According to the Rule of 20, with inflation near zero, PE multiples should be anywhere between 15 and 25.
The current CPI stands @ 0.9. link
According to Thomson,
Of the 443 companies in the S&P 500 that have reported earnings to date for Q2 2010, 75% have reported earnings above analyst expectations.
The blended earnings growth rate for the S&P 500 for Q2 2010 is 38%.
The forward four-quarter (Q3 2010 – Q2 2011) P/E ratio for the S&P 500 is 12.7, below the average forward four-quarter P/E ratio of the previous 52 weeks (14.2).

 *prices as of close August 5, 2010

Also looked at a multiple regression analysis that assessed the correlation of core CPI rates with earnings yield of the S&P 500 Index. Withe the core CPI @ 0.9% the market “should be” at a 20. P/E based on the historical statistical best fit between earnings yield and core CPI. That would indicate that the S&P is trading at a 48% discount. Even Doug Kass wrote back in Jun e[at the Doug Kass bottom of '10] with the S&P 500 then at 1030, trading at 11.5 2011 earnings. >>LINK

The outlook now is that the second half of 2010 will not be as robust as expected, that the recovery is slowing. But as recent economic reports have shown, it is continuing to expand and not contract.
The Jobs Report Friday morning was disappointing to say the least, but the late afternoon rally was very impressive. More than likely the markets are pricing in a new quantitative-easing move by the Fed (Tuesday FOMC) this week.

"Curb Your Enthusiasm"

 Subscribe in a reader
Will the jobs report knock the economy back down, with Doug Kass, Seabreeze Partners Management.