The S&P's Most Bearish Indicator Is Flashing Red

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From moving averages andBollinger Bands to the "golden cross ," themarket is littered with technical indicators. 

But there is one indicator that stands alone in its accuracy and bearishness.

This indicator has been an incredible predictor of weakness in the market, flashing brightred warning signals before the market crashes of 1987 and 2008.

And right now, it is warning that trouble lies ahead for the S&P 500.

The Hindenburg Omen is widely considered to be the mostbearish technical indicator in the entire market. Named for the iconic zeppelin crash, this indicator is a combination of technicalfactors that measure the health of the New YorkStock Exchange.

The rationale is that under normal conditions, a substantial number ofstocks may set either new annual highs or new annual lows, but not both at the same time. With a healthy market possessing a measure of uniformity, the simultaneous appearance of many new highs and lows is an indicator of potential weakness.

The predictive accuracy of the Hindenburg Omen has been impressive. Of the previous 25 confirmed signals, only two (8%) have not resulted in at least mild (2% to 5%) declines.

  • Major crash: 27% probability
  • Selling panic of at least 10% to 15%: 39% probability
  • Sharp decline of at least 8% to 10%: 54% probability
  • Meaningful decline of at least 5% to 8%: 77% probability
  • Mild decline of at least 2% to 5%: 92% probability
  • Signal is an outright miss: 7.7% probability (1 out of 13 times)

And now, the Hindenburg Omen has reared its bearish head once again, flashing a big warning signal to investors on April 15. 

It was the first time the Hindenburg Omen has been triggered since August 2010, when the Federal Reserve narrowly averted another market crash with QE2, a second round of quantitative easing that sent stocks on a 30% rip in the next eight months.

But withthe Fed recently acknowledging that it's almost tapped out on itsQE program, thecentral bank can't be counted on to step in and save the market this time around. That means this could be the perfect time to take someprofit on the biggains in the past six months and get more defensive heading into the cyclically weak months of summer.

Here are two of my favoritefixed-income investments to reduce exposure to volatility in stocks and diversify acrossasset classes.

PIMCO Total ReturnETF (Nasdaq: BOND)
Launched in March 2012, the PIMCO Total Return exchange-tradedfund has quickly become one of the most popular fixed-income investments in the market, with average dailyvolume of 494,000 and assets under management of $5 billion.

Consistent with legendary PIMCOfund manager Bill Gross' stellar performance history, the fund's total return has returned a peer-crushing 11% in the pastyear that ranks this ETF in the 90th percentile against its peers. And with ayield of 1.95%, compared with the 1.7% yield on the 10-yearTreasury note , the fund has offered an impressive combination ofcapital gains andincome .

iShares iBoxxInvestment Grade Corporate Bond ( LQD )
Thisindex of investment-grade corporate bonds is another popular destination for fixed-income investors, with average daily volume of 2.1 million and assets under management of $24 billion. This ETF offers an impressive combination of yield and value, carrying adividend yield of 3.83% and anexpense ratio of just 0.15%, a discount of more than half over its category average of 0.31%.

Risks to Consider: The Fed and other central banks worldwide are still committed to stimulating theeconomy . Although they have depleted much of their resources in the past four years, a sharp drop in the stock market could trigger anotherwave of monetary stimulation as it did in 2010.

Action to Take --> The Hindenburg Omen is one of the most bearish indicators in the market, frequently preceding a crash or significant weakness in the market. The signal just flashed red for the first time since 2010, making this a good time to take profit on big winners from the rally in the past six months and act more defensively heading into the cyclically weak summer months.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Basics

Referenced Stocks: LQD

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