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
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
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%
- Mild decline of at least 2% to 5%: 92% probability
- Signal is an outright miss: 7.7% probability (1 out of 13
And now, the Hindenburg Omen has reared its bearish head once
again, flashing a big warning signal to investors on April
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
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 (
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.