–––––––––––––––––––––––––––––––––––––––––– The Daily Crux Sunday Interview The Daily Crux: Jim, for readers who aren't familiar with you, can you give us a quick background of how you became involved in the markets?
Dear Daily Crux reader,
One of the most talked-about subjects in the markets this year was the ominously named Hindenburg Omen.
Named after the deadly explosion of the German airship in 1937, this indicator is believed to signal an impending stock market crash. It's been around for years but first reached the mainstream when it was triggered numerous times in 2008. We all know what happened next.
The buzz around the signal reached a fever pitch this past summer. The signal was mentioned almost everywhere you looked... in The Wall Street Journal, on CNBC, and on countless financial websites. Even conservative lightning rod Glenn Beck mentioned it on his Fox News show.
But there's a great deal of misinformation about this indicator, and the signals this summer weren't nearly as bearish as many believe. To get the full story, we sat down with the man who knows the Hindenburg Omen better than anyone... because he created it.
Read on to learn how Jim Miekka, a blind physics teacher-turned-market technician developed this controversial indicator, and where he thinks the market is headed next.
I guarantee his answer will surprise you.
Good investing,
Justin Brill
Managing Editor, The Daily Crux
www.thedailycrux.com
The real story on the Hindenburg Omen:
An interview with creator Jim Miekka
Jim Miekka: Well, I was a physics teacher in my younger days. But in my late 20s, I unexpectedly went blind. And through some various twists and turns, I ended up becoming interested in the markets and began managing my own money. As time went on, I started managing money for some friends of the family, as well.
In the early 90s, a stockbroker who was familiar with my work asked me to do a newsletter for him. I ended up writing a newsletter for him for something like three years. At some point he could no longer pay me, but still wanted me to write it. So after that I just decided to write it on my own... That's how I started the letter that I still write to this day.
Crux: You're best known as the creator of the Hindenburg Omen, the ominous-sounding crash indicator that was all the talk on Wall Street this summer. How did it come about?
Miekka: I got into the mathematical analysis of the financial markets through my friend Kennedy Gammage. He's since passed away, but he was a market technician who used to be a regular on the old Financial News Network, and I got to know him pretty well.
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He would publish some of the things I did, and I would publish some of the things he did. And over time I became pretty well versed in many of the technical indicators like the McClellan oscillator, and those things kind of laid the groundwork for my creating the Hindenburg.
Kennedy was also the first one to publish my work on the Hindenburg in The Richland Report and then several other publications picked it up.
But that was back in the 90s and it wasn't until the last few years that it's really gotten a lot of press. I'm still pretty surprised at how much it's gotten around. I mean I was getting calls this summer from The Wall Street Journal and they were telling me everyone on Wall Street was talking about it.
It was quite a surprise. I didn't think there were too many people using it... but apparently there were a lot more than I knew about.
Crux: For those readers who might not know, can you explain exactly what the Hindenburg Omen is?
Miekka: Well, in the simplest terms it's just a confluence of technical market signals that suggests that stocks are at risk of a crash. It requires a few specific things.
First, you have to look at the number of new highs and new lows that are occurring in the stock market.
Specifically, you need to see new 52-week highs and new 52-week lows exceed 2.4% of total issues traded, which works out to about 80 stocks, right now. So you need to see at least 80 stocks making new highs while at least 80 stocks are making new lows, based on current market conditions. Also, the new highs can't be more than twice the new lows.
The general idea is that this kind of internal discord tends to signal an unhealthy or unstable market.
Next, we look at the McClellan oscillator... To get a signal, the oscillator needs to be negative. And I've found that the Omen has much more significance if the McClellan summation index gets to 1,800 or below.
Finally, you want to see that the New York Stock Exchange moving average is rising.
So if you've got all those happening at the same time, that's a Hindenburg Omen – which was named by Kennedy Gammage in reference to the Hindenburg disaster of 1937... alluding to the idea that a disaster could be coming. But it's not as black and white as many people tend to think.
If you get this set of conditions, it's similar to a funnel cloud. When you see a funnel cloud, it doesn't mean there's definitely going to be a tornado... but you're probably not going to get a tornado without a funnel cloud first. And if you do see one, it's usually wise to consider getting into the storm cellar and waiting until it blows over.
It's a similar idea here... Seeing a Hindenburg Omen just means that conditions are conducive for a crash to happen. So it's probably a good idea to be vigilante and take appropriate measures to protect yourself.
Also, the more of these signals you get over a period of time, the more importance it tends to have.
Crux: Can you explain why you put so much importance on the McClellan indicators?
Miekka: I've found them to be useful tools in the context of the Hindenburg, specifically, and trading, in general.
To use the tornado example again, if you see a funnel cloud, you're probably going to keep a close eye on it to see if it's going to turn into a tornado. If you don't see one coming out of the cloud after long enough, you'd say, "Well, it looks like this cloud's going to pass by."
I've found following the McClellan indicators to be like watching that funnel cloud intently. They're a great indicator of the status of that cloud. If you get a Hindenburg, and then you see the oscillator very negative and the summation going down hard, you say to yourself, "Looks like we may get that tornado after all."
Crux: There were several confirmed Hindenburg Omens this past summer, but we obviously haven't seen anything close to a crash. Is it safe to say the storm has passed?
Miekka: There were four or five altogether, but the problem was that the McClellan summation index was fairly high. It got down to 1,900, but never fell below the important 1,800 level I mentioned before. And then the McClellan oscillator turned positive.
I was interviewed on CNBC during that time, and I said that as long as the oscillator stayed positive we were unlikely to get a significant decline. And that's exactly what has happened. The market hasn't dropped significantly since then.
But even if the oscillator were to turn negative now, it's not necessarily a bad sign. Statistically when the summation is above the 1,800 level, the market tends to rise, regardless of whether the oscillator is positive or negative.
That's why I follow the summation index along with the oscillator. If you look back at all the big market declines, they've usually occurred with the summation around 1,500 and below... or even 1,000 and below.
So even if the oscillator were to turn negative and hit 100 or so – which is a fairly oversold condition – it would have to maintain that for 20 to 30 days to get the summation index down to a level where a big crash would likely occur. And that would take us into November, when we typically see seasonal strength in the stock market.
So it's possible we might get a 5% or 10% correction from current levels. But I believe we're going to be limited on the downside, based on these technicals. A big decline appears unlikely at this time. And as long as the McClellan oscillator stays positive, I wouldn't go short the market.
In fact, if we could get one more selloff here, I'll be looking for a technical buy signal.
Crux: What exactly will you be looking for?
Miekka: Well there are a few signals we could see that would interest me.
One would be a put volume buy signal, where we get a selloff and the volume of put options traded doubles its 10-day moving average. That's often a great time to buy.
Another would be a McClellan oscillator formation that's known as a complex bottom and a buy spike. But for that, you need the summation index to fall below 1,000. And like I said, that looks unlikely at this point.
We could also get a market indicator that we've reached an escape velocity from the current trading range. These are based on measurements of breadth and volume.
So far, we haven't seen any of those... So we're kind of in no man's land at the moment. But I'm looking to be 100% invested within the next two months or so... And I'm looking for the best time to buy in now.
If you're already fully invested, I think your risk is dramatically less than it was a month ago, so I wouldn't necessarily sell now. Once we get past the next month or two, we're going to be getting into a place where the risk-to-reward ratio is very favorable for the bulls.
I'm currently out of the market and waiting to buy in. When we got the first Hindenburg a couple of months ago, I got out. Typically, you get some bad times in October, too. So it may not be such a bad time to be out of the market. We still have the potential for some downside. It's just not as high risk as it was before... We might get an F1 tornado, but we're not going to get an F5. Like I said, if I was fully invested I would be tempted just to ride it out at this point.
That's the way it looks to me right now. It's always tough to be bullish when you're famous for a bearish indicator, but I have to go with what the numbers say. That's why I publish my letter every week... the technicals change. You have to change with what the market indicators are doing.
Crux: Are there any specific sectors or stocks you may be focusing on when you get those buy signals?
Miekka: I'll be looking to buy technology shares. I would look to one of the tech funds like the Fidelity Select Diversified Technology or the Power Shares QQQ ETF.
We're going into a seasonally strong period where this part of the market is likely to outperform. You could also consider buying Apple or Microsoft or some of the large technology stocks that tend to follow the direction of the overall market. You want to buy something that's likely to go with the market.
With a little research, you could probably find some stocks that have a high correlation with the market but tend to make bigger moves. If you could find a stock with those characteristics, that might be particularly good. But again, I would focus on the technology sector.
Like I mentioned before, once we get into the fall season – particularly from about mid-November all the way through the end of 2011 – we'll be in a period of time where the market is likely to be up 20% or more on the S&P, and perhaps 50% on the NASDAQ/technology sector, which tends to outperform during the third year of the presidential cycle.
As a matter of fact, if you had bought and held the Fidelity Select Technology fund only during the third year of the presidential cycle – going back to 1983 when it became available – I believe you would have handily outperformed the market. And, of course, your risk would have been much lower.
The worst year during that period was 1987, when the market crashed in October. But even then the Select Technology fund was still up a small amount for the year. Even in the year of the crash it was up.
So it's been a pretty consistent phenomenon where we're coming into the strongest and best seasonal time, and the technicals have a certain amount of strength that's likely to bridge us between our current position and the seasonal strength beginning in November. That should limit our downside to maybe 10% maximum from here until we get to the other side.
Crux: What would have to happen for you to change your mind?
Miekka: Well, if we got another Hindenburg and the McClellan summation index got down to around 1,500 with a very negative oscillator, I'd probably reconsider. If we had a condition like that, I'd say, "Yeah, maybe we're going to have a decline after all," and maybe the big selloff will occur a little late in November or something. I mean it's unlikely, but it's not unheard of.
So I'd look for very negative readings on the McClellan oscillator followed by an additional Hindenburg. If we saw that I'd say, "Well, by golly maybe we're not out of the woods yet."
Crux: Sounds good. Thanks so much for talking with us, Jim.
Miekka: My pleasure. Thanks for having me.
Editor's Note: If you're interested in learning more about Jim's weekly letter, TheSudbury Bull and Bear Report, you can contact him for more information at (727) 866-8682 or dmiekka@cs.com.
Sunday, 10 October 2010
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