Despite the mainstream media's desperate need to play down any and every potential indication that all is not well with the "buy the dip" mentality, there is no hiding the fact that volatility is back and nowhere is that more evident in the guts of the Hindenburg Omen calculation. Just as we saw in October 2007, when NYSE margin was just as extended, credit spreads were just as compressed (and today's extreme range), and valuations were just as high, the Hindenburg Omen signals are starting to cluster (in a confirming manner). First on April 15th, second on Friday, and now third today marks the first such cluster since Bernanke saved the day in August 2010. Perhaps for those not running for the hills, UBS' Art Cashin's views are noteworthy, "proponents of the Omen will tell you there has never been a crash without the presence of the Hindenburg Omen. Sounds pretty compelling, indeed. Skeptics, however, note that every occurrence of the Hindenburg Omen has not been accompanied by a crash. In fact, three out of four times, there is no crash. Sounds a lot less compelling now. So, an omen is a caution – not a cause."
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From historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77% [The Wall Street Journal 8/23/2010 article states that accuracy is 25%, looking at period from 1985], and usually takes place within the next forty days. The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%. Though the Omen does not have a 100% success rate, every NYSE crash since 1985 has been preceded by a Hindenburg Omen. Of the previous 25 confirmed signals only two (8%) have failed to predict at least mild (2.0% to 4.9%) declines.
- The daily number of NYSE new 52 week highs and the daily number of new 52 week lows are both greater than or equal to 2.8 percent (this is typically about 84 stocks) of the sum of NYSE issues that advance or decline that day (typically, around 3000). An older version of the indicator used a threshold of 2.5 percent of total issues traded (approximately 80 of 3200 in today's market).
- The NYSE index is greater in value than it was 50 trading days ago. Originally, this was expressed as a rising 10 week moving average, but the new rule is more relevant to the daily data used to look at new highs and lows.
- The McClellan Oscillator is negative on the same day.
- New 52 week highs cannot be more than twice the new 52 week lows (though new 52 week lows may be more than double new highs).
- The traditional definition requires each condition to occur on the same day. Once the signal has occurred, it is valid for 30 days, and any additional signals given during the 30-day period should be ignored. During the 30 days, the signal is activated whenever the McClellan Oscillator is negative, but deactivated whenever it is positive.
- Some users of the omen may choose to view the 30 day limit as "working days" and not "calendar days".