McHugh’s Monday Market Briefing, April 17th 2006
We received a third Hindenburg Omen Monday, April 17th, 2006. This extends the risk period, as the clock continues to tick on the 73.8 percent probability that equities are about to fall over 5 percent from current levels over the next four months, on the 52 percent probability that equities will drop more than 8 percent over the next four months, on the 39 percent probability that equities will drop 10 to 14.9 percent over the next four months, and on the 26.1 percent probability that the stock market will crash — either fast or slow motion — over the next four months. Only one out of 11.5 times does this signal fail to generate at least a 2 percent decline from current levels. Most declines are well underway within a month of this signal. This is only the 24th confirmed Hindenburg Omen in the past 21 years, and so far has a cluster of three signals. We got one almost exactly two years ago, on April 13th, 2004, which led to a 5.4 percent drop before the PPT stopped it cold with massive infusions of liquidity. We got one on September 21st, 2005, which the PPT also stopped with huge chunks of M-3, that one coming along with the three devastating Hurricanes of 2005. There has not been one major stock market decline over the past 21 years that was not first preceded by a confirmed Hindenburg Omen. Here we go again.
As of April 177h, 2006, here are the cluster of signals (3 so far) that meet all five of the conditions required for a potential stock market crash warning:
April 17th, 2006: There were 3,440 issues traded on the NYSE Monday, with 113 New 52 Week Highs and a rising 190 New 52 Week Lows. The common number of new highs and lows is 113, which is 3.28 percent of total issues traded. The McClellan Oscillator came in at negative –163.12, and the 10 week NYSE Moving Average is rising. New Highs were not more than double new lows.
April 10th, 2006: The figures were 3,463 total issues traded on the NYSE Wednesday, with 86 New 52 Week Highs and 104 New 52 Week Lows. The common number of new highs and lows is 86, which is 2.48 percent of total issues traded, above the minimum threshold of 2.2 percent. The McClellan Oscillator came in at negative -135.71, and the 10 week NYSE was rising. New highs were not more than double new lows.
April 7th, 2006: The figures were 3,435 total issues traded on the NYSE Wednesday, with 167 New 52 Week Highs and 103 New 52 Week Lows. The common number of new highs and lows is 103, which is 3.00 percent of total issues traded, above the minimum threshold of 2.2 percent. The McClellan Oscillator came in at negative -120.43, and the 10 week NYSE was rising. New highs were not more than double new lows.
As for the McClellan Oscillator, Monday’s change from Thursday’s was small, as was Thursday's from Wednesday’s. While not a guarantee, small changes in this indicator usually lead to large price moves within a few days. The past three day’s readings were –163.12, -164.24, and –168.38. There are a couple of ways to label the decline since April 7th’s small degree wave 2 top: Either we have traced out five waves down — the first leg of a small wave three in process, which means we are due for a 150 point rally in the DJIA — or we are just starting a sub-degree wave three down inside the small wave three, which means we could see a couple hundred point decline over the next few days. So the EW labeling is not directionally helpful short-term. This afternoon’s out-of-the-blue rally had strong volume behind it, which suggests a possible small rally could follow. The PPT may be getting nervous as the Dow Industrials near 11,000. In fact, CBOE put options are on the rise, hitting 105 percent of their 10 day average Monday, and the PPT Intervention Risk indicator rose a bit to minus -5.23. Any short-covering rally here is not likely to lead to a significant multi-week advance, not until our PPT indicator rises toward positive18.00.
The Dow Industrials lost 63.87 points Monday, closing at 11,073.78. NYSE volume was light at 85 percent of its 10 day average. Downside volume was unimpressive at 56 percent, and declining issues were a mild 55 percent. S&P 500 downside points were only 49 percent. While these figures suggest Monday was a mild down day, NYSE New 52 week Lows hit their highest level all year, and were the most since November 16th, 2005. Our studies of New Lows indicates that we are not approaching a multi-month bottom until they rise above 300. The higher they go, they more long-lasting the bottom. The point is, we are not near a multi-month or even multi-week sustainable bottom here.
S&P 500 Demand Power fell 1 point and the absence of buyers was responsible for the mild decline as Supply Pressure was Flat at 398. Selling has been slow to develop, and until it does, any decline should be mild. Our Secondary Trend Indicator fell 3 points to minus –7, and is still within the neutral zone of minus -30 to plus +30.
The Blue Chip indices’ key trend-finder indicators remain on “sell” signals Monday. The DJIA 14 day Stochastic Fast measure fell to 30.00, below the Slow reading of 32.00. It’s “sell” from April 7th remains intact. The S&P 500/DJIA Purchasing Power Indicator fell to a new low for the decline since April 11th, at 87.59, but the decline was small and on a rounded decimal basis, this indicator was flat Monday. The NYSE Advance/Decline Line Indicator fell to minus –383, and its “sell” from April 7th remains in force.
The Russell 2000 small caps index fell 1.64 points to 749.47. Volume was light at 91 percent of its 10 day average, with downside volume a mild 56 percent and declining issues at 62 percent. The Russell 2000 Purchasing Power Indicator remains on its “sell” from April 10th at 106.20, and would need to rise above 109.95 to trigger a new “buy.” The RUT’s 10 day average Advance/Decline Line Indicator dropped to minus –288, and its “sell” signal from April 10th remains in play.
The NASDAQ 100 appeared to have a bad day on its surface, and the point loss was sharp, however our measure of underlying Demand Power and Supply Pressure indicated that both buying and selling was lackluster. Demand Power fell 1 point to 397, while Supply Pressure rose 1 point to 402. NDX volume was 96 percent of its 10 day average, with downside volume a strong 85 percent, declining issues at 77 percent, and declining points at 78 percent. What showed up to trade was primarily to the downside, we just didn't see a huge underlying push to dump stocks.
Both NASDAQ 100 key trend-finder indicators remain on “sell” signals Monday evening. The NDX 14 day Stochastic Fast measure comes in at 33.00, below the Slow at 46.60, and its “sell” from April 10th remains in force. The Stochastic measures the momentum of breadth. The NDX Purchasing Power Indicator comes in at 110.82, down 3 points, to a new low for the recent decline. It’s “sell” from April 11th remains intact. The Purchasing Power Indicator measures the net effects of supply and demand, with our Demand Power and Supply Pressure indicators a breakdown of the separate components of the PPI.
Gold had another huge up day. Gold is telling us inflation is out of control, is telling us the government inflation statistics are lies, is telling us money supply is rising through the roof, despite the Fed hiding the M-3 figures. The HUI Amex Gold Bugs Index rose 13.79 points, or 4.0 percent Monday, to a new high at 362.54. Volume was strong at 109 percent of its 10 day average, with all issues advancing. Both key trend-finder indicators remain on “buy” signals Monday evening, the HUI 30 day Stochastic Fast measure rising to 100.00, above the Slow at 95.06. Its “buy” from March 24th remains intact. In fact, study the HUI Purchasing Power Indicator chart from issue no. 308 last Wednesday, and take notice of the incredible correlation of moves. This indicator is a huge money maker for those trading the HUI, or a proxy such as Newmont Mining (NEM). It does a marvelous job siphoning out any “noise” and identifying the multi-week trend. Since it generated a “buy” on March 24th, the HUI is up 48 points, or 15.3 percent. This one indicator alone is worth ten times the cost of a subscription to our newsletter. The HUI Purchasing Power Indicator rose to a new high at 235.02, and its “buy” from April 14th remains intact. It is more sensitive to smaller corrections within the primary trend.
Gold the metal rose a whopping $16.80 Monday, to close solidly above $600 an ounce at $613.31. We have been on record suggesting that Gold could be headed for $800 an ounce sooner than many folks anticipate. Silver also had a bust out day, rising almost vertically to $13.50, up $0.60 on the day. Oil (WTIC) rose $1.16 a barrel to $71.98 Monday. When inflation assets rise like this, equities are in grave danger. The Dollar fell one percent, down 0.89 to 88.66. Bonds rose a hair to 107^13.
Bottom Line: We are sitting in treacherous equity market waters here. Cash is good. However, don’t be surprised by a short-covering rally attempt over the next few days as a small corrective move up is possible. But perma-bull buying here is serving the useful purpose of taking stocks off the hands of the wise at or near a major market top. Caution is warranted.
Best regards,
Robert McHugh, Ph.D.