In part 1 of our commentary, we discussed the current Fundamental Gravity of our “Slowing Drag...
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12/07/2017 10:50 am EST
The probability of an equity market correction over the next few months is slim to none, so there could be further upside in XLY. As long as it trades above $93.07, then use weakness below $96.54 to initiate new long trades, suggests Landon Whaley of Focus Market Trader.
It’s that time of year again, when you can’t turn around without running into either a retail sale or a financial market forecast. But don’t worry, I’m not going to regale you with all the trouble that comes from making investment decisions based on a forecast, at least not this week.
No, this week I’m focused on that other time-honored financial market tradition: fear mongering. Wouldn’t it be nice if these guys at least cooled it during the holidays?
Unfortunately, that’s not the case, so we have to put up with their stories of impending financial doom while we drink eggnog and stuff our stockings. The catalyst du jour that fear mongers are pointing at for the coming market apocalypse is an indicator known as the “Hindenburg Omen.”
If you’ve never heard of the Hindenburg Omen as it pertains to stocks, then consider yourself lucky. This “indicator” is about as useful for predicting market corrections as a one-legged man in a butt kicking contest.
For the uninitiated, there are three criteria that together trigger the Hindenburg Omen.
First, the number of stocks in a specific exchange hitting 52-week highs and lows must both exceed 2.2 percent of the total number of stocks that trade on that exchange.
Second, the McClellan Oscillator, a measure of market breadth based on advancing and declining stocks, must be negative that day.
Third, the benchmark index for the exchange must trade above its 50-day moving average.
Apparently, this doomsday indicator correctly called both the 1987 and 2008 market crashes. Unfortunately, outside of those two occurrences, it gives more false positives than a free clinic.
Data-dependent says what?
The Omen called for a market crash in 2010, but instead U.S. equities gained 13.1% that year, while experiencing just a 7.6% drawdown. We didn’t even get a stock market correction (i.e., a drawdown of over 10%), much less a crash (a drawdown of over 20%). This “boy who cried wolf” moment caused the indicator’s creator and main proponent, Jim Miekka, to abandon it all together.
If the guy who staked his reputation on this fairy-tale indicator wants nothing to do with it, then why is it still getting ink (or pixels)?
If what happened in 2010 isn’t enough for you to change the channel when the talking heads bring up the 1937 disaster-inspired indicator, how about an incident a bit closer to home?
This past May, the Hindenburg Omen was triggered on both the NYSE and the Nasdaq, marking just the tenth time ever that the Omen has made an appearance on two different exchanges at the same time.
“OMG-osh, what do we do?!” he says, putting his hands on his face and doing his best Macaulay Culkin impersonation.
Since May 5, when this ominous indicator was sighted like a Yeti, the S&P 500 Index (SPX) has gained 11.4%, while experiencing a massive 2.1% drawdown. How has the Nasdaq fared since being marked with a Scarlet A, you may ask? The Nasdaq 100 (NDX) has gained 12.9%, while experiencing a 4.8% drawdown.
The latest Hindenburg sighting occurred three weeks ago, just in time for Thanksgiving with the family. The result? Since making its presence felt like a Demogorgon in Stranger Things, the S&P has gained 2.6% (with a 0.50% drawdown), and the Nasdaq 100 is up 0.8% (with a 1.74% drawdown).
I hate to break it to the doom-and-gloom crowd hoping to sell you “crash-proof” portfolios and precious metals at a discount, but if U.S. growth accelerates, then the current market Hindenburg will continue flying, with no fiery crash in sight.
Seven hours with Leo and Kate
In addition to The Omen, another doom-and-gloom indicator was also triggered on November 14: the “Titanic.” Apparently, this sign of impending doom occurs when the number of companies making new lows on the New York Stock Exchange exceeds the number of companies making new highs, within seven days of a 12-month high in the S&P 500 index.
The last time these two indicators reared their ugly heads simultaneously was July 2007. Well, if this combo platter really is predicting an analog to 2007, then the market should rally another 14% over the next three months. Furthermore, we have at least another 14 months before any real market-related carnage begins.
If we really are headed for a market crash, there will be plenty of real economic and financial market signs of a coming correction. But remember, the signs won’t have scary names like “Hindenburg” and “Titanic.” The signals will be much more mundane and less “econopocalypse” worthy, like outright contractions in things like industrial production and retail sales.
The bottom line
Do yourself and your portfolio a favor and ignore any market-related indicator or story with a historic calamity attached. These fear-mongering indicators predict website clicks better than they will ever predict actual market direction.
If you remain data dependent, process driven and risk conscious, then you know it’s nothing but clear skies for U.S. equities from now through the end of the year. U.S. economic data remains robust, inflation is healthy and U.S. yields are holding steady. All of this adds up to a conducive environment for U.S. equities that is characterized by more upside potential than downside risks.
The trade idea
One of the sectors that has historically performed well during the type of U.S. economic environment we are currently experiencing is consumer discretionary.
The probability of an equity market correction over the next few months is slim to none, which means there could be further upside in the Consumer Discretionary SPDR ETF (XLY).
As long as XLY trades above $93.07, then you can use weakness below $96.54 to initiate new long trades.
Depending on where you enter the trade and how much room to move you want to give this trade, you can use a risk price between $94.34 and $91.79.
That said, your risk price line in the sand is $91.79, if XLY touches that price, even for a second, then you should exit any open trades.
If the trade moves in your favor, you can book profits on some, or all, of your position on a rally to the $98.55 to $99.52 range.
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