Well this is a new one on me; the Hindenburg Omen. Wikipedia has a page on it and Michael Kahn mentioned it in his column yesterday.Per Wikipedia a divergence of stocks making new highs and stocks making new lows creates a higher probability for a crash.
I was on Capital Connection on CNBC Europe about a week and a half ago and felt quite certain we would be in for more volatility. I was on again last night and said I expect volatility to continue.
From a slightly bigger picture viewpoint all of the things that the worriers have been talking about like the carry trade, threat of an economic slowdown, subprime and so on have all contributed to the selloff.
There has been no shortage of commentary about what these things will mean to stocks so the market action of the last week or so should not be a total shock. The market is always worried about a bunch of things, this is obvious. It makes sense to be cognizant of the market's current fears and make some sort of assessment for yourself about how real the threats are and what is a reasonable bad case scenario.
For example I do not think the fundamentals of the subprime issue will be anywhere near as bad as the doom and gloomers think. However even if the fundamentals aren't so bad (or more aptly so widespread) that does not mean that the pounding thus far in the financial sector won't get worse because it could. The emotions that move the market short term will matter more for the next couple of weeks (or longer?) than whatever the realities of the fundamental story are.
10 comments:
Mike C,
Re hedging, do you use ultra short etfs? If so, at what point? Personally, think it's a bad idea to do so on weakness...a kin to chasing a stock. I'd prefer to do so on strength....either a bounce or better when the market looks toppy. Then again, shorts have not worked well for me but would like to get a system to hedge/dampen downturns. The other option is more cash.
TomK. hooray, a man who does not hide on a bad day. thx for sharing.
Hey, I didn't know this "syndrome" had a name. I like it. I remember some analysts talking about this in the very late 90s.
I am one of those running around trying to avoid dirigible fragments. I am down about 3-4% in the past week and would be tolerant of maybe an 8-10% total loss before bailing, but maybe Roger's 200DMA on the S&P is a good bail point.
As far as shorting, I have heard several "pros" recommend TWM (double inverse Russell) since the Russell has been the weakest performer YTD. It looks like Australian and NZ are really taking a pounding in spite of the fact that their dairy industry will continue to bring in record profits from sales to SE Asia. Any thoughts on that?
Smooth sailing to all. Scoot
Those double short dudes move very fast. Best used as a hedge.
I'm thinking of starting a subscription service. I'll email people when I think of buying QID. Whenever I think about buying it we've reached a bottom in whatever downmove we're in. It's uncanny.
I just looked at several components of my timing model and I'm trying to determine where we might be by the end of the day. Odds are the 5dma of the Value Line Composite Index and the Russell 3000 will be below their 75dma. That is usually a first alert of a possible trend change.
However, the sentiment components are starting to signal extreme levels of pessimism. Goefert's Smart/Dumb Money model will probably breach the OS level by eod. His Composite model is also near OS territory.
Given these developments it looks like my timing model might be closer to 2.0 or 1.5, not the .5 I mentioned yesterday. I'm targeting an 80% long allocation by the close of today and re-evaluate over the weekend.
The usual pattern is this: Huge wave of selling (this week), sizable bounce (early next week?), followed by another big drop - establishing a new low.
I think the S&P will retrace to 1500 prior to another fall.
tom k,
a subcriber that I follow is big on 21 day p/c ratio. Believes never extreme at start of bear mkt. If reading is over 1.05 they do not short. Most likely scenairo....sellling, bounce, selling, then back to bull rally....so they think. They expect to test the long waters in 1-3 days!
Playing SSO here for a bounce could be smart
''Hindenburg Omen'' seems such a poor handle, it has too much of the woo-woo to attract the attention of the more serious minded. Too bad, really. All criticism aside, it's a model that uses sound technicals to come to conclusions about the market. As far as I know, one analyst using the technical data and making his name in predicting Hindenburg Omens is a Robert McHugh and his technicalindicatorindex.com.
He's been right on the money and full of ''ominous warnings"" for long enough lately.....
Mike C,
Re hedging, do you use ultra short etfs? If so, at what point? Personally, think it's a bad idea to do so on weakness...a kin to chasing a stock. I'd prefer to do so on strength....either a bounce or better when the market looks toppy. Then again, shorts have not worked well for me but would like to get a system to hedge/dampen downturns. The other option is more cash.
No, I don't use the short ETFs. I'm not really a fan of them. There are some issues/problems with them, especially if you intend to hold them for a longer time frame. It's been discussed in several notes on seekingalpha. Here is an example:
http://etf.seekingalpha.com/article/35789
Bear markets tend to be very choppy, with sharp upside reversals so I do not think these products would be as effective for hedging during a bear compared to alternatives.
My preference is put options and/or put option spreads, but I would say you need to be fairly knowledgeable with options to do this. You should understand delta, implied volatility, etc. and understand how to get the specific level of hedging desired and how to adjust the position as the market declined.
As far as timing, I'll go back to the idea Roger mentioned how about "down a little" versus "down alot". I don't worry about down a little so right now my put option exposure is negligible. I am somewhat defensively positioned as I have major positions in Hussman Strategic Growth and Berkshire Hathaway which I expect to outperform in down markets.
I would be increasing my put option allocation if I thought "down alot" was likely, and I would use closing below the 200 day moving average and trading below it for some time to help gauge that. I also like to use the 50 day moving average relative to the 200 day moving average (golden cross and death cross) to help determine major changes in trend. This particular indicator was one reason I liquidated the substantial majority of my REIT position in early June and so far that is looking like the right move.
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