Oh, the Humanity! Another Selloff Rattles Investors

It was a dark day on Wall Street.

The Dow dropped 274 points. The S&P 500 slumped by more than 1.5%. The tech-heavy Nasdaq Composite lost almost 2%.

An ornery August trading month is finally showing its teeth. Investors who eagerly bought the dip after last week’s drop are stuck with losses. The bears have an opportunity to force stocks into a genuine pullback for the first time in more than a year. They might even get the help of a spooky indicator that’s sneaking back into the picture.

Oh, the humanity! I’m talking about the Hindenburg Omen.

Nazi imagery is all over the news this week thanks to the events in Charlottesville. Now it’s infected the markets. We’re seeing breathless mentions of the Hindenburg Omen all over the financial media. If we are to believe the warnings, the stock market is nothing more than a fiery zeppelin crash waiting to happen.

On top of the perfectly-named Hindenburg Omen, we are experiencing some actual market weakness and volatility creeping into the picture. Conditions are ripe for some new worries. The click-hungry financial media is cashing in.

The message is simple: Sell your stocks and take cover. This ship is about to blow!

If only investing was this simple…

In reality, the Hindenburg Omen is a tough nut to crack. If you’ve bothered to read any of the articles that cite the indicator, you’ve probably noticed that none of them explain what the hell the Hindenburg Omen measures. That’s because it’s incredibly complicated. Fully grasping the Hindenburg Omen requires more than a rudimentary understanding of simple technical analysis techniques.

I’m not even going to bother wasting my time trying to lay it all out for you. I can’t even come up with a simplified explanation beyond the fact that it’s bearish and it involves tallying NYSE advances plus declines and new highs vs. new lows. And that doesn’t even begin to get into the nuances of what’s required to trigger the indicator.

What I can tell you is that Hindenburg Omens are starting to come in waves. Multiple sources are reporting spotting a Hindenburg Omen on the S&P 500 during five out of the past six sessions.

“Such clusters typically lead to poor returns in subsequent days and the last time a similar trend emerged, in November 2007, stocks fell by 1.6% in the following week and 2.3% two weeks later, MarketWatch notes. “A year later, the S&P 500 was about 40% lower.”

Despite all the commotion, these signals don’t guarantee an imminent correction. In fact, the last time the market caught Hindenburg fever was August 2013. Going back over my market stats from four years ago, I noted 11 Hindenburg Omens materialized in from late July to mid-August 2013. But the S&P 500 finished the year up 30%.

If the Hindenburg Omen had a mundane name, it never would have caught on. Its track record for calling major tops isn’t consistent. Most people don’t even know how it works. It looks good in a bearish market story, but it’s not something you should use as a trading signal.

It’s no secret that stocks are pointing lower right now. But we’re ready for a pullback.

Let’s keep a close eye on our trades instead of blindly selling our positions based solely on fear. Keeping a clear mind during a correction (of any magnitude) will put you eight steps ahead of every other investor on the planet.

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning