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The following is a guest post by Charles H. Dow Award winner, Wayne Whaley (CTA) of Witter & Lester. If you would like to be privy to his daily market comments and model ratings via daily email, free of charge, email him at wayne[AT]witterlester.com with the subject title “ADD ME TO DAILY EMAIL”.
The Hindenburg Omen Signal flashed a sell signal this week and will draw a lot of attention this weekend. If you google the signal, you will see that several of the criteria are predicated on a large number of issues making both New Highs and New Lows on the NYSE composite, a phenomena that I have researched and written about in the past (for more, see: Confusion Index). A reader ask for my take of the signals implications today so I thought I would pass along my response to him.
The NYSE composite index is comprised of approximately 3200 issues of which about 50% are non-operating companies, many of which are interest rate sensitive bond funds. Throughout the last decade this has been overlooked by many analyst for two primary reasons.
- It is generally not an issue, because most of the time, bonds and stocks move in the same direction, often with bonds leading stocks which was very convenient.
- NYSE Composite data is very available, listed in the financial sections of most newspapers and on most financial web sites, while tape data on an index such as the S&P 500 or NYSE common stocks are not because they do not have a parent exchange conveniently computing their statisitics each day.
At this point in stock market history, specifically the last week, you have a Draconian disconnect between bonds and stocks an event that normally happens when you get historically low interest rates resulting from recessionary and deflation concerns. This has resulted in a large numbers of issues making new highs on the NYSE, 95% of which are interest sensitive funds. At the same time a large number of actual stocks are making new lows, incorrectly suggesting confusion in the equities. See below for a list of the Wall Street Journal’s list of 52 week New Highs and New Lows on August 13 to get an appreciation for the issues being listed as New Highs each day:
If you examine the S&P 500 or the Nasdaq index you will see this is not the case for predominantly equity only indexes. Below is a table showing New Highs and New Lows on each of the three Indexes for the previous week.
Notice that on Wednesday and Thursday (August 11th-12th), the NYSE showed more issues making New Highs than New Lows. This is an incredibly misleading equity statistic because there were more than ten times as many issues making New Lows than New Highs on both the S&P 500 and Nasdaq indexes.
I am always leery of stating that this time is different, but I don’t see the Hindenburg Omen Signal in play using any index of equity only issues, which is not to say that the market can’t go lower for other reasons.
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