Wednesday, October 12, 2005

 

Stock Market Crash Prediction

As you may know, I have a philosophy regarding financial markets which is the opposite of what most market commentators think. I believe that mass social mood is the driving force behind moments in the market and that the ups and downs of the Dow are merely reflections of changes in societal mood. For example, you might hear on CNBC that the market was down today because of worries about oil prices, a hurricane or earthquake, or whatever bad news, or news perceived to be bad, happens. I would look at it this way. The market was down because the aggregate mood of the participants was negative. The news may be bad but that has nothing to do with why the market went down. On any given day there is good news and bad news and the market goes up or down. And all the business news channels will use the good news to justify an up day and the bad news to justify a down day. Socionomics explains why the stock market can rise at a time when the price of energy in this country is rising. It also explains why 4 years into a war with psychopathic killers bent on the destruction of our civilization that stock prices have held up. The stock market will go down when the stock buying public perceives these exogenous events to be bad for stocks, not when the events happen.

I have believed for awhile that a great bull market ended in the US during the first half of the year 2000. The first leg down ended in the around fall 2002/spring 2003 at the the subsiquent rally is a bear market rally which will fail to move the major indexes (Dow Industrials, S&P 500, Nasdaq) above the highs they made in 2000. A certain pattern in the stock market and a certain indicator have aligned to make a crash seem much more likely in the near term.

So what is a Hindenburg Omen? It is the alignment of several technical factors that measure the underlying condition of the stock market - specifically the NYSE - such that the probability that a stock market crash occurs is higher than normal, and the probability of a severe decline is quite high. This Omen has appeared before all of the stock market crashes, or panic events, of the past 21 years. All of them. No panic sell-off occurred over the past 21 years without the presence of a Hindenburg Omen. The way Peter Eliades put it in a recent Daily Update, September 21, 2005 (Peter is well worth the read, believe me), "The rationale behind the indicator is that, under normal conditions, either a substantial number of stocks establish new annual highs or a large number set new lows - but not both." When both new highs and new lows are large, "it indicates the market is undergoing a period of extreme divergence — many stocks establishing new highs and many setting new lows as well. Such divergence is not usually conducive to future rising prices. A healthy market requires some semblance of internal uniformity, and it doesn't matter what direction that uniformity takes. Many new highs and very few lows is obviously bullish, but so is a great many new lows accompanied by few or no new highs. This is the condition that leads to important market bottoms."


I want to also point out the obvious. It is October, a month in which the stock market has had some of its most dramatic drops and, to be fair, most important bottoms. Caveat investor.

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