neverpost, a reverse corollary to the Hindenburg Omen?
Is a bottom in place?
Commentary: Indicator that has a good track record is close to a buy signal
By Mark Hulbert, MarketWatch
Last Update: 12:01 AM ET Aug 8, 2007
ANNANDALE, Va. (MarketWatch) -- It's a bird. It's a plane. It's a Hindenburg!
Or maybe it's just a bull.
Let me explain.
The Hindenburg Omen, as I explained last week, is an esoteric technical indicator that has recently been triggered on several occasions - something that its devotees believe to be a reliable indicator of impending serious stock market weakness, if not a crash. See Aug. 2 column
The Hindenburg Omen focuses on the number of stocks on the New York Stock Exchange that are hitting new 52-week highs or 52-week lows. It is considered to be evidence of a churning market when there is a large number in both categories, which in turn is thought to be bearish.
It turns out, however, that the conditions that trigger a Hindenburg Omen can metamorphose quickly into a buy signal from a closely-related indicator called the NYSE new high-new low indicator. And it appears as though just such a metamorphosis has already occurred in recent sessions or could do so soon.
I have been unable to determine who created the NYSE new high-new low indicator or its genealogy. Among the newsletters I track, one that explicitly relies on it in timing the stock market is Systems & Forecasts, edited by Gerald Appel.
The indicator is calculated by dividing one number by another. The numerator is the number of new 52-week highs on the NYSE, while the denominator is the number of both new 52-week highs and 52-weeks lows. To smooth out volatility in this indicator, followers often then calculate a moving average. Appel, for example, relies on a 10-day moving average.
Appel considers the indicator to have flashed a sell signal whenever it rises above a threshold level (70% or so) and then turns down. Buy signals, in his opinion, are triggered by just the reverse: The indicator dropping below some threshold (20% or so) and then turning back up.
It is this latter condition that appears to be shaping up. According to Appel, before the market opened Tuesday morning, the indicator then stood at just 9%, "an unusually oversold reading." Though Appel sent no communication to his subscribers after the close of Tuesday's session, that day's trading undoubtedly caused this indicator to turn up.
It unfortunately is unclear the extent of the reversal. According to data posted at the Markets Data Center at The Wall Street Journal's online site, the new high-new low indicator based just on Tuesday's trading stands at 14.1%. But that data set includes all issues on the NYSE, including preferred stocks and bonds. Based on the more restrictive data posted on the MarketWatch Web site, this indicator, based on only Tuesday's trading, is now at 22%.
Appel has said that a good entry point to get back into the stock market will be when the 10-day moving average of the NYSE new high new low indicator rises to 20%.
Another firm that pays close attention to the new high-new low indicator is Dorsey Wright & Associates of Pasadena, Calif. Unlike Appel, that firm considers the indicator to be bullish just by dropping to as low as it is today, though the firm reports that it is even more bullish when it turns back up from very low levels.
In a release sent out Tuesday night by Mike Moody, senior portfolio manager at Dorsey Wright, wrote that "Research conducted by Dorsey, Wright Money Management indicates that the NYSE high-low index is one of the very few highly reliable indications of a general market bottom. It is indicating a very favorable opportunity in the market right now."
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