–––––––––––––––––––––––––––––––––––––––––– The Daily Crux Sunday Interview The Daily Crux: Jim, we heard there had been a confirmed Hindenburg Omen this week. Is that correct?
Dear Daily Crux reader,
Something important happened this week you didn't hear on CNBC or read about inThe Wall Street Journal... but it could have a huge effect on stocks going into the new year.
The Hindenburg Omen – the ominously named market crash indicator – was unexpectedly triggered just a few days ago. You might recall that it most recently was triggered this summer, and nearly everyone in the financial media was talking about it.
But when we sat down with Jim Miekka – the creator of the Hindenburg Omen – to get the real story, we learned that he was actually bullish on stocks. He thought far too many people were bearish and expecting a crash, and that the signal was a false alarm. As it turns out, he was right... The market rallied strongly and is up more than 20% since then.
How quickly things change...
Today, investor sentiment has gone from bearish extremes to bullish extremes. Fund managers, newsletter writers, and individual investors alike are more bullish on stocks than they've been in years. And absolutely no one is talking about the Hindenburg anymore.
As contrarians, this makes us nervous... So we went back to Jim for his latest thoughts. Read on to learn why he thinks this time may in fact be different, and what to watch to know for sure...
Good investing,
Justin Brill
Managing Editor, The Daily Crux
www.thedailycrux.com
You won't see this anywhere else...
Jim Miekka: Yes, that's correct. There was an initial signal on Tuesday, which was then confirmed on Wednesday.
Crux: The last time we talked, you mentioned one of the reasons you didn't believe the Omen would lead to a crash was that everyone was watching it. But this time around there's been no mention of it. What do you make of that?
Miekka: Well, I'm seeing two disturbing things in the market. First the Hindenburg, and second the sentiment.
Nobody's talking about the Hindenburg. And also, according to the latest survey from Investors Intelligence, there are 36% more bulls than bears, which is a relatively extreme reading and a sign for caution. Both these things indicate we could be at a market top of some significance.
On the other hand, the seasonality is very favorable. We're looking at the last eight days of December, which statistically are the best consecutive eight days of the year, and we're also going into the third year of the Presidential cycle, which is also the strongest.
So we've got some very bearish and bullish factors in play. And the question is, which will win this tug-of-war? To try and figure that out, I look at other technical indicators.
In particular, the McClellan Oscillator and Summation Index I mentioned last time we talked.
Crux: Can you remind us what you look for in those indicators?
Miekka: Instances where Hindenburgs have occurred and the market has crashed, the McClellan Oscillator dropped below zero and stayed negative for a prolonged period of time. Also the Summation Index has usually been pretty low, below zero in most cases, but almost always below 1,800.
To contrast that, the last time we had a confirmed Hindenburg Omen – earlier this summer – the Summation Index stayed above 1,800 the entire time, and the Oscillator turned positive, which indicated a relative low in the market. If you had followed those indicators, you would have stayed in the market and caught a nice rally this past fall.
Currently, the Summation is about 2,300 and the McClellan Oscillator is a just barely negative. So, we'll really need to watch those over the next several weeks.
Like I always say, the Hindenburg tells us there's a funnel cloud, but the McClellan Oscillator and its companion the Summation Index will let us know if there's going to be a tornado. So they should give us a clue which way the market is heading... Whether we're going to follow the usual, bullish seasonal pattern or the Hindenburg.
Crux: Do you have an opinion which way we're likely to go?
Miekka: Well, I had been planning to add to my long positions on margin starting on the 21st, due to the fact that we have the favorable seasonality and also the favorable technicals. Because of the recent signals, I'm not going to go on margin.
I am remaining long the market for now, but if we get a breakdown in the Oscillator and Summation Index, I think it may be a good idea to exit the market in spite of the seasonal strength.
But right now, according to the McClellan indicators, we aren't in danger of a market crash. As long as the Summation Index is above 1,800 or the McClellan Oscillator is positive, I will assume that the bullish seasonality is going to win and stay long.
Crux: What kind of move in stocks would it take get the McClellan indicators down to the point where you'd be worried? Would it have to be a fairly long bout of selling or would a couple solid down days be enough?
Miekka: Most likely it would take about a week for those numbers to get to that position. Currently, the Summation's at 2,300, the Oscillator would have to go down an average of negative 100 for a period of five days. So, I would say it would take about a week at least.
But I just checked the market, and today the breadth was 900. So it's not going in that direction currently. Right now it's going the other direction, but it could happen in about a week.
Crux: Is there a time limit in which the McClellan indicators must move following the confirmed Hindenburg Omen?
Miekka: We usually look for about a month-and-a-half following the Hindenburg. So if we get into the middle of January, and we still have that Summation Index above 1,800, I would say at that point it's pretty unlikely we're going to have a breakdown.
Unless, of course, we get some more Hindenburgs. That may change the picture or extend the time period. But if nothing happens by the middle of January, I would say at that point, we can breathe a sigh of relief and look forward to a good year, as is usually the case in the third year of the Presidential cycle.
Crux: Last time we talked, I believe you mentioned you were favoring the technology sector for the coming year?
Miekka: That's right. Technology has historically had a significant advantage over other sectors during this period.
I may have mentioned it last time, but if you bought and held the technology sector for the third year of the Presidential cycle only, and were in cash the rest of the time, you'd have beaten the market by only being invested 25% of the time.
Coincidentally, the 1987 crash occurred in the third year of the Presidential cycle, although not at the beginning. It obviously occurred in October. If I recall, the market topped out in August and then retested its high. We had about four Hindenburgs in September, and then it crashed in October.
But what's interesting is, if you look at that year from beginning to end, the technology sector actually was up about 2%, as I recall. Of course, the market had gone way up during that year, before the Hindenburg, but it still shows just how favorable the year is for technology.
So this is the best time to be invested in the technology sector, which I am now. But due to the fact that we have the confirmed Hindenburg, I'm going to be watching these other indicators very carefully and will consider exiting the market if necessary. Once we get a confirmed Hindenburg, it indicates that if the market doesgo down, it has a really good chance of going down big.
Crux: Any parting thoughts, Jim?
Miekka: I think the most important thing to do right now is to follow some of these intermediate-term trend-following indicators. It's the best way to do it. Whether you use the Oscillator and Summation like I do, or prefer something simpler like some type of moving average of the major indices, if you see the trend turning down it should be taken more seriously than usual.
We've got that funnel cloud. If the storm comes it could get pretty nasty.
Crux: Thanks for talking with us, Jim.
Miekka: My pleasure. Take care.
Editor's Note: If you're interested in learning more about Jim's weekly letter, The Sudbury Bull and Bear Report, contact him for more information at (727) 866-8682 or dmiekka@cs.com.
Sunday, 19 December 2010
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