WEEKLY UPDATE

September 3, 2010

The Hindenburg Omen

One technical indicator that has been getting a lot of buzz lately is the Hindenburg Omen, which was activated in late August. Apparently it was given the name Hindenburg because "Titanic" was already taken! The name alone is so scary to some that I thought it wise to discuss it.

The indicator professes to signal an imminent stock market crash, but it has only had 25% accuracy since 1987.

The Hindenburg is quite technical in nature. It is a concurrence of several requirements on a single trading day:

The requirements:

1. More than 2.5% of NYSE stocks must hit a 52-week high and more than 2.5% must hit a 52-week low on the same day
2. The number of new 52-week highs cannot be more than double the number of new 52-week lows
3. The NYSE 10-week moving average must be rising
4. The McClellan Oscillator (a NYSE measure indicating overbought or oversold conditions) must be negative

The logic is that the stock market must have some internal uniformity of direction, otherwise stock investors will become too confused and leave the market altogether. Investors hate uncertainty.

Once the Hindenburg Omen flashes, it must flash again within 40 days to confirm the signal. It first hit on August 12 and was confirmed by another signal on August 20. It flashed a third time again in late August.

This indicator has gone off before every stock market crash since 1987; however, it has also signaled many times without an ensuing crash.

Based on historical occurrences of the Omen, the probability of a stock market crash (>20% decline) is now 25% for the near future. Although that also means there is a 75% chance of no such decline, a one-in-four probability is something that must be considered, especially at a time when:

1) The bond market is also predicting a huge sell-off
2) Elliot Wave theorists also predict a huge sell-off
3) The housing market may already be in a double dip
4) The service sector is near recession, again
5) US GDP growth declined almost 60% from Q1 to Q2 of 2010
6) Unemployment continues to rise
7) Fed Chairman Bernanke feels the need to assure the markets that the Fed will do whatever is necessary to support a continued recovery, despite being unable to lower interest rates any further

The Bottom Line:

We understand that the Hindenburg Omen has been triggered, but we also realize that the markets are complicated in nature. We use many different sources of information, i.e. fundamental economic data and direction, technical market indicators, stock valuations, investor sentiment and our clients own individual investment goals and tolerances for risk when recommending various investment positions. The Hindenburg is just one indicator that we keep an eye on when assisting our clients to meet their goals.

Take care,
Greg

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September 2, 2010



Happy Labor Day Weekend!

- Manufacturing is a bright spot - The ISM Manufacturing Index showed a slight improvement for August when the opposite was expected. Manufacturing in the U.S. is a fraction of what it used to be, but while U.S. consumers continue to cut back on spending, foreign interest in our goods still exists. Manufacturing is, in fact, the only part of our economy that has shown consistent signs of recovery.

- Construction spending has fallen again - Construction spending fell 1% in July and is down nearly 11% from year-ago levels. With today's high inventory of houses and commercial properties on the market, it is no wonder construction spending is falling.

- Consumers are not spending - Automakers are reporting horrible sales for August. GM said sales plummeted 25% in August from year-ago levels; Toyota's U.S. sales were down 34%, and Honda's were down 33%.

- Job outlook remains bleak - This week's ADP employment report for August showed that the job market is continuing to deteriorate, with the private sector losing 10,000 jobs - the first monthly loss since last December. New jobless claims were 472,000 for the latest week, significantly higher than that which can sustain job growth.

Bond funds remain strong

Below is a chart of several bond funds and how they have traded this year. Bonds rallied strongly in August, but if there were any soft spots in August they were in Ginnie Mae-type bonds, but they did grow stronger during the second half of August. All in all it was a strong month for bond investors.



Stocks

It seems that many stock traders started their holiday early this week. Trading volume was very light, and this usually increases volatility, which was illustrated on Wednesday when the Dow jumped 254 points. Economics was not a factor in the move as much as the bears simply were exhausted after making August a terrible month for stock investors. This created a perfect opportunity for the bulls to defend a key level of support that the market has had for the past year.

I have drawn a white line on the chart below to show where a battleground has been playing out between the bulls and the bears. This trend line is at the 1,040 level on the S&P 500 Index and marks a key area that bulls have defended many times since last summer. I have placed a green arrow on the chart every time the market has fallen to or below the 1,040 level.

Recently the bears had pushed the market down to the 1,040 level but could not go further. Finally on very thin trading the bulls won the battle and pushed the market higher. Wednesday's rally pushed the market up far enough to re-trace 50% of the previous decline. Now the market is back at a key resistance level and will need a new positive incentive upward if the bulls are to have any hope of going higher. The odds are against the market going much higher without a spurt of stronger-than-expected economic news. Look for tomorrow's non-farm payroll data.



What does this mean for investors? Well if you're a long-term investor, you are likely still bearish and if you are a short-term trader, you went from a bear to a bull and back to a bear in one day!

Have a happy and safe Labor Day!
Greg