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Category: Chart of the Week

Hindenburg Omen and Titanic Syndrome Could Signal Big Trouble for Stock Market

Hindenburg Omen and Titanic Syndrome Could Signal Big Trouble for Stock Market.  We’re obviously not talking about the German airship that went down in flames in New Jersey nor the “unsinkable” British passenger liner that hit an iceberg and sank. What we re talking about is sets of conditions in the stock market that historically have been followed by big downturns, if not crashes.  Known as the Hindenburg Omen and the Titanic Syndrome, both happened during recent trading sessions on the Nasdaq. As a result, showing great underlying market weakness despite record index highs. You’ll note in the chart below on Nasdaq performance since 1962 to 2019 big drops when the Hindenburg and Titanic kicked in (signified by the red dots).

As Jason Goepfert of Sentiment Trader explains it, basic guidelines of the Hindenburg are that (1) the market must be in an uptrend, (2) a large number of stocks be hitting 52-week highs and 52-week lows, and (3) show negatively diverging breadth momentum. The Titanic adds that the index has to have hit a high in the last seven trading sessions. This followed by more stocks hitting record lows than highs. To simplify this, both are trying to predict dangerous times ahead when an index is doing well.   However, there is strife under the surface. Goepfert points out these conditions hit both the Nasdaq and the NYSE in late July. Just before the August downturn, but has not yet occurred on the NYSE.  Nevertheless this is a clear warning sign of trouble ahead, particularly when combined with other signs of overall stock market weakness.

Hindenburg Omen and Titanic Syndrome Could Signal Big Trouble for Stock Market
Hindenburg Omen and Titanic Syndrome Could Signal Big Trouble for Stock Market

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Money market assets are rising quickly…not necessarily a buy signal

Money market assets are rising quickly…not necessarily a buy signal.

Money market assets are rising quickly...not necessarily a buy signal
Money market assets are rising quickly…not necessarily a buy signal

The table below shows the other months when the 12-month rate of change in money market assets first exceeded 25%.

Money market assets are rising quickly...not necessarily a buy signal
Money market assets are rising quickly…not necessarily a buy signal

It wasn’t much of a signal in 1989, with a gyrating market over the next year. It was a great buy signal in ’95 and ’98, with exceptional gains over the next 1-2 years.
Then came the next two signals. While the bear market had already started in 2001, the ramping up of assets in money markets by June of that year signaled only about the half-way mark of risk aversion. In 2007, investors were shoveling money into money markets well ahead of trouble in the major equity indexes, and losses over the next couple of years were massive.

That doesn’t tell us a whole lot about our current juncture. Two signals were excellent buys, two were excellent sells, and one led to extreme choppiness.
More than anything, what we can take away is that this is by no means an automatic contrary signal. It’s abnormal given the market context, and it has led to wildly diverging results. Beware assuming it is a buy signal.

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Beware! There’s Trouble Simmering Below Surface of  Record Nasdaq Index Highs

There’s Trouble Simmering Below Surface of  Record Nasdaq Index Highs.  The Nasdaq index record highs are being propelled by a decreasing number of stocks that compose the index. That means things are not nearly as healthy for Nasdaq stocks in general as the record highs would suggest, says Jason Goepfert of SentimenTrader. Put another way, notes Mark Minervini, “the Nasdaq composite index is weak.”  In fact the number of stocks composing the index trading above their 200-day moving average has fallen below 50%. And that historically results in bearish returns for the Nasdaq over the following three-to-six months, (see chart) .

Beware! There’s Trouble Simmering Below Surface of  Record Nasdaq Index Highs

Beware! There’s Trouble Simmering Below Surface of  Record Nasdaq Index Highs
Beware! There’s Trouble Simmering Below Surface of  Record Nasdaq Index Highs

However, most of these dates were overlaps. So if we exclude overlapping signals over the past month…

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Another Signs Stock Market is on Thin Ice: Companies are Buying Back Stock at Prices Above Replacement Value. 

The chart below shows that many stocks are priced above their replacement costs and companies are buying back stock at high prices above replacement value. So why do companies continue to pay ridiculously high prices above replacement cost for their own stocks? That’s because they are trying to prop up earnings at any cost. That’s what happened in 2000 before the major downturn. So watch out! This is yet another indication the market is trading on very thin ice. (Thanks to Jill Mislinski for the chart from Advisor Perspective)

Another Signs Stock Market is on Thin Ice: Companies are Buying Back Stock at Prices Above Replacement Value. 
Another Signs Stock Market is on Thin Ice: Companies are Buying Back Stock at Prices Above Replacement Value.

 

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Why Lowest Interest Rates in 5,000 Years are Worrisome, Even for Stock Market

Why Lowest Interest Rates in 5,000 Years are Worrisome. The chart below from Bank of America Merrill Lynch contends interest rates are at their lowest going all the way back to 3,000 B.C. at the time of the pharaohs of the first dynasty of Egypt. Is that right? We do know for certain interest rates are the lowest in modern history.  The reason is a combination of quantitative easing, zero and negative interest-rate policies.

Why is this so worrisome? Today’s capital system was not created for zero interest rates.  Pension funds and insurance companies, for instance, generally base future payouts on actual assumptions of 5% to 8% annual gains. Investments in fixed income instruments compose the largest part of those assumptions.  As company pension funds begin missing their actuarial targets, they will be forced to dip into corporate earnings to fund the difference in order to pay their retirees. And that means lower earnings and lower stock prices, That’s contrary to the general assumption that low interest rates often lead to a migration by investors to stocks, and therefore, higher stock prices.

Why Lowest interest Rates in 5,000 Years are Worrisome, Even for Stock Market
Why Lowest interest Rates in 5,000 Years are Worrisome, Even for Stock Market

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