Mystery of the Hindenburg Omen

June 23, 2008 – 12:00 am

The market tends to see a certain idea introduced which becomes a focus and nothing else matters.

The focus du jour for traders appears to be the Hindenburg Omen. This is a data-mined signal that is supposed to be an early warning of a market crash. The good thing about it is that it has worked relatively well in real-time trading, but the bad thing about it is that it gives a lot of false warnings.

Lately, we had two consecutive days with a Hindenburg Omen.The last two times it did so were last July and October, both excellent warning signs of more trouble to come. Historically, such signals have been more successful than not at highlighting times of heightened market risk over the next few weeks to a few months.

So what is a Hindenburg Omen? It is the alignment of several technical factors that measure the underlying condition of the stock market — specifically the NYSE —such that the probability that a stock market crash occurs is higher than normal, and the probability of a severe decline is quite high.

This Omen has appeared before all of the stock market crashes, or panic events, of the past 22 years. No panic selloff occurred over the past 22 years without the presence of a Hindenburg Omen.

Another way of looking at it is, without a confirmed Hindenburg Omen, we are pretty safe. But we have one as of October 19th, 2007. That first Hindenburg Omen signal expired October 13th. Then the markets generated a second comfirmed Hindenburg Omen cluster. The first observation occurred on October 16th, 2007. It was confirmed on October 17th. A total of observations occurred within this cluster.

How has this signal performed over the past 22 years, since 1985?

• The traditional definition of a Hindenburg Omen is that the daily number of NYSE New 52 Week Highs and the Daily number of New 52 Week Lows must both be so high as to have the lesser of the two be greater than 2.2 percent of total NYSE issues traded tha day. However, this is just condition number one.

• That the NYSE 10 Week Moving Average is also Rising (condition # 2),

• and that McClellan Oscillator is negative on that same day (condition # 3).

Critics have taken this definition and pointed rightly to several failed Omens. A research done by Robert McHugh, Ph.D showed that if we add two more filters, the correlation to subsequent severe stock market declines is remarkable.

• Condition # 4 requires that New 52 Week NYSE Highs cannot be more than twice New 52 Week Lows, however it is okay for New 52 Week Lows to be more than double New 52 Week Highs.

• The fifth condition for high correlation is for a confirmed Hindenburg Omen. For the omen to be “official,” there must be more than one signal within a 36 day period, i.e., there must be a cluster of Hindenburg Omens (defined as two or more) to substantially increase the probability of a coming stock plunge.

TO RECAP: we have an unconfirmed Hindenburg Omen if the first four conditions are met, but the fifth is not , ie when we only have one signal within a 36 day period.

Once a second or more Omen occurs, we then have a confirmed Hindenburg Omen signal with substantially higher odds that a subsequent stock market plunge is coming.

Based upon the five parameters noted above, Confirmed Hindenburg Omens are very rare. There have been only 26 confirmed Hindenburg Omen signals over the past 22 years.

All the biggies over the past 22 years were identified by this signal as defined with the five conditions. It was present and accounted for a few weeks before the stock market crash of 1987,

We also need to take into account that the Fed could intervene by pumping liquidity as it did in September 2005 to stave off a crash. The Fed did the same in April 2004 but even with liquidity, the market fell 5%.

NOW the Omen is bandied about, and the crash is yet to come, unless condition # 5 occurs.This skin-of-the teeth confirmation says a lot for multiple strong confirming signals, for without the 5 conditions, it is easy to say the Omen is more a hype!

Listen to Audio at awanginvest.com/?p=454

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BEHOLD……there will be H2O!

http://awanginvest.com/?p=445&preview=true#comment-217comment-217comment-217

There Will Be Water

http://www.businessweek.com/magazine/content/08_25/b4089040017753.htm

Attention to this article came from NicT of HK. H2O is more precious than any kind of Gold, black or yellow after Oxygen. Thanks, Nic, for this life-saving piece.

T. Boone Pickens thinks water is the new oil—and he’s betting $100 million that he’s right

Pickens hopes to run a water pipeline over 250 miles and 650 tracts of private property from the Texas Panhandle to thirsty Dallas Nancy Newberry

by Susan Berfield

This Issue

June 23, 2008

Is Water The New Oil?

Click to listen :

Podcast: Behind the Story

ANA aka IDKT

Ag Moderator

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Solar Index -ETF

Oil up 697% since 2001   

http://awanginvest.com/?p=440

Solar Two

OIL RIG

IT IS TOPICAL : CRUDE, ENERGY AND ALTERNATIVE ENERGY!

Watching an interview of a Shell top executive on CNBC on the concerns of increasing oil prices hitting near to USD140 triggered me to write on solar energy. Questions were put to him as to what Shell has done to look into alternative energy, a clean renewable energy for that matter. He assured on TV that Shell has, in fact, started a system using wind energy and it will make a difference in 10 years’ time.

One alternative energy which can be harnessed is solar energy. What is solar energy? Concentrated sunlight has been used to perform useful tasks since the time of Ancient China. Also legend has it that Archimedes used polished shields to focus sunlight on the invading Roman fleet and repel them form Syracuse. In 1866, Auguste Mouchout used a parabolic trough to produce steam for the first solar steam engine. The list goes on that subsequent developments led to the use of solar-powered devices for irrigation, refrigeration and locomotion.

Concentrating Solar Power (CSP) systems use lenses and tracking systems to focus a large area of sunlight into a small beam which is then used as a heat source for a conventional power plant. Technologies developed as the solar trough, parabolic dish and solar power tower. In all these systems, a working fluid is heated by the concentrated sunlight and then used for power generation or energy storage.

Storage is vital issue because modern energy systems usually assumes continuous availability of energy. Solar energy is not available at night, and there are unpredictable weather patterns to contend with. Therefore, storage media or back-up power systems must be used.

Thermal mass systems can store solar engery in the form of heat at domestically useful temperatures for daily or seasonal durations. Well designed systems can also lower peak demand and reduce overall heating and cooling requirements.

Solar energy can be stored at high temperatures using molten salts. The Solar Two used this method of energy storage, allowing it to store with an annual storage efficiency of near to 99%.

Excess electricity can also be fed into the transmission grid. For large scale use of renewable energy the most practical storage is hydro-storage.

The reason why I have given a little background of solar energy is the fact that the solar energy industry is a big business today. Some solar manufacturers have bigger market capitalizations than many well-known energy companies.

You can read Profiting from Clean Energy (Wiley 2008) by author Richard Asplund, also the investment analyst who developed the index underlying the world’s first solar exchange traded fund (ETF) - the Claymore/MAC Global Solar Index Exchange Traded Fund (TAN).

According to Asplund, even the US is waking up to the investment opportunities by starting a lot of research in thin-film solar and a lot of venture capital is flowing into basic solar research.

This industry is technology driven, with skilled labour. For example, Renewable Energy Corp of Norway just decided to build their big new plant in Singapore where skilled labour is available and cost of labour is not the issue. Speculation as to why they did not choose China could be : intellectual property protections, infra-structure of transport and pollution issues. This is not a straight commodity business but a high technology business.

According to Asplund, ETF structure is a good way to diversify risks. The advantage of the ETF structure is the diversification of the portfolio across technology. The investor owns all and if whatever works, will take off inside the index.

People sometimes look at solar investing as if it is a bubble, a science experiment bubble like the dot com boom of the late 1990s. Actually, the solar industry has been out of the lab for years and is in mass production on a big scale. The US and other countries have been working on solar for 30 – 40 years.

The solar sector in 2007 had USD30B worth of sales and is profitable. Twenty of the 25 stocks in the MAC Solar Index had a profit in 2007. This is a bricks-and –mortar sector; during the dot com bubble, there were no profits to base the valuations.

There is short term risk from changes in regulatory policy but this industry is being driven in part by subsidy-supported demand as in Euro zone and even in the US. Costs are expected to come down and over the next three years, prices should come down to reach grid parity.

Hence, over the long term , the industry is moving towards grid parity and short term fluctuations should not matter so much as companies in the lead in the solar sector are going to make big bucks.

With the prices of oil going north each day after intermittent retracements, it is time to chill off and to log on to solar ETFs.

ANA aka IDkit

Ag Moderator

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Happy Phi Day — Perfect Time for Some ‘Phi-nancial’ Fun

http://awanginvest.com/?p=432

TODAY IS PHI-DAY, and it may be of great interest to reader-traders to delve into the wonders of Phi and I have inserted many links in this post so that readers can have the option whether to delve deeper into this Golden Ratio which impacts our sphere of activities, even our DNA.

The golden ratio has fascinated intellectuals of diverse interests for at least 2,400 years. But the fascination with the Golden Ratio is not confined just to mathematicians. biologists, artists, musicians, historians, architects, psychologists, as even mystics have pondered and debated the basis of its ubiquity and appeal. The Golden Ratio has inspired thinkers of all disciplines.

Phi for Neo-phi-tes

What is Phi?

Phi is simply an irrational number like PI (3.14) (p), but one with many unusual mathematical properties. Phi to the first 15 places is 1.618033988749895. What makes it more unusual is that it can be derived in many ways and shows up in relationships throughout the universe.
MORE AT http://awanginvest.com/?p=432

The Fibonacci numbers and principle is also used in the financial markets. It is used in trading algorithms, applications and strategies. Some typical forms include: the Fibonacci Fan, Fibonacci Arc, Fibonacci Retracement and the Fibonacci Time Extension.

The list goes on about the fractals of the spirals depicting the Golden Ratio. Today being June 18 (6-18) marks (1.618) Phi-day and I hope to write more about Phi again when we celebrate Phi-day in 2009 and the years to come.

TODAY, let us say Hip Hip Hippie-Ray that Ray’s hopes and Ray Waves like EWI Waves (all fractals of Golden Ratio) will radiate and permeate us all.

ANA aka IDkit

Ag Moderator

6-18 , 2008

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Index speculators, a new breed

from http://awanginvest.com/?p=415

It is educational for readers/traders to understand why commodity prices keep rising in spite of ample supply. Please read the testimony and you will be enlightened!

June 10, 2008 – 10:58 am

michael-masters-written-testimony

This excerpt of a Testimony by Michael W Masters before the US Senate has been submitted by NicT of HK which I reproduce hereunder:

What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets: Institutional Investors. Specifically, these are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant.

These parties, who I call Index Speculators, allocate a portion of their portfolios to “investments” in the commodities futures market, and behave very differently from the traditional speculators that have always existed in this marketplace. I refer to them as “Index” Speculators because of their investing strategy: they distribute their allocation of dollars across the 25 key commodities futures according to the popular indices – the Standard & Poors - Goldman Sachs Commodity Index and the Dow Jones - AIG Commodity Index.

Please read more at link at the top of page.

It is educational for readers/traders to understand why commodity prices keep rising in spite of ample supply.

Here is a bonus to go with the abovementioned article - NUGGET OF TRADING WISDOM: 2% Rule

The 2 % rule is a basic tenet of “risk management” or “capital preservation” as they are more descriptive than “money management”.

Larry Hite, in Jack Schwager’s Market Wizards (1989), mentions two lessons :

1. Never bet your lifestyle ie never risk a large chunk of your capital on a single trade.
2. Always know what the worst possible outcome is.

Hite goes on to describe his 1 % rule which he applies to a wide range of markets. This has since been adapted by short-term equity traders as the 2% rule:

This means that a drawdown of 10 consecutive losses would only consume 20% of your capital.

Ana aka IDkit

Ag. Moderator

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