By Roger Nachman
Today was the day the markets died.
Well, I don’t want to be too dramatic, but there was a 2nd Hindenburg omen confirmation in as many days, after the first appearance back on August 12. Earlier, I wrote that we only needed 10 more new highs to reach the Hindenburg omen and we got it. So what does this mean?
Well it doesn’t mean you should go into full-blown panic and sell everything you own, but it does mean you should take extra precaution going into next week, and further out.
The fifth condition of a Hindenburg omen is that there must be more than one signal within a 36-day period. We’ve had 3 in a span of 7 trading days. That seems pretty important and statistically significant to me.
The reason that multiple signals are important is that once a second or more Omen occurs, there are substantially greater odds that a stock market plunge is coming. A plunge is defined as at least a 10% dip in the major averages.
There is almost a 78% per cent chance, according to the calculations below, that a correction of 5% or more happens, so it’s definitely something traders should pay attention to.
Of the 27 confirmed Hindenburg Omen signals, eight (29.7%) end of the world type crashes followed.
Three instances (11.1%) were followed by stock market selling panics (defined as a correction, 10%-14.9% dips). Four (14.8%) caused sharp declines (almost a correction, resulting in 8%-9.9% drops). Six (22.2%) saw meaningful pullbacks (5%-7.9%), four (14.8%) saw mild declines (2.0%-4.9%), and two (7.4%) were nothing more than slight pullbacks, with dips of 2.0% or less.
The last two occurrences, found here, to happen in such a short time frame were December 2nd, 1991 and October 11, 1989. December 1991 had 9 signals over 7 days and fell 3.5%. October 1989 had 2 signals and dropped 10% over 5 days.
No matter how you slice it up, there is a strong chance the averages will fall by at least 2%, most likely more.
To position a portfolio, investors may want to take advantage of the added leverage that the Direxion ETF’s give you. The three ETF’s I highlight are the Direxion Daily Financial Bear 3X Shares ETF, Direxion Small Cap Bear 3X Shares ETF and Direxion Daily Tech Bear 3x Shares ETF.
The reasons I highlight these three ETF’s is for very different, but very important reasons.
Financials are generally seen as a market indicator. The markets can not rally without help from the financials, and thus will sink if the financials fall. Using the leverage from the ETF, this should help juice returns a little.
In a severe market correction, small caps tend to lose value more as investors use larger corporations as safe havens and are seen as better stores of value. Remember, this is seen as a return of capital, not a return on capital.
So there you have it. We have Hindenburg confirmation. Whether it actually happens or not still remains to be seen, but investors need to know that it is statistically important, and this gives them a few different ways to protect, and even profit from this.
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