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Wednesday, August 25, 2010

Hindenburg Omen - Definition and History

There is a lot of talk on TV and in the press about the Hindenburg Omen.
From Hindenburg Omen The Hindenburg Omen is a technical analysis pattern that is said to portend a stock market crash. It is named after the Hindenburg disaster of May 6, 1937, during which the German zeppelin Hindenburg was destroyed.
In order for the Hindenburg Omen to be reached, all of the following must occur:
1. The daily number of NYSE new 52-week highs and the daily number of new 52-week lows are both greater than or equal to 2.8% of NYSE issues trading that day.
2. The NYSE’s 10-day moving average is rising, or the index has moved higher during the past 50 trading days.
3. The McClellan Oscillator is negative on the same day. This is the the difference between the advancing and declining equities on the NYSE.
4. New 52-week highs cannot be more than twice the new 52- week lows (though new 52-week lows may be more than double new highs).
The traditional definition requires each condition to occur on the same day. Once the signal has occurred, it is valid for 30 days, and any additional signals given during the 30-day period should be ignored. During the 30 days, the signal is activated whenever the McClellan Oscillator is negative, but deactivated whenever it is positive.
This is important:
The Hindenburg Omen has predicted every stock crash since 1987, BUT it also has a ton of false positives. Only about 25% of the time does it actually foretell a crash. 

The criteria above for the omen has actually been met twice this month, once on August 12th, and another time last Friday the 20th. 
The model portfolios in the Retirement Advisor already account for market events like these so we have made no changes.

 
The Retirement Advisor Portfolios
Dollar Value       on 7/31/2010
Change
Model Portfolio 1
$219,682
9.8%
Model Portfolio 2
$231,512
15.8%
Model Portfolio 3
$248,518
24.3%
DJIA 12,501.52 on 1/1/2007
$10,466
(16.3%)
S&P500 1,418.30 on 1/1/2007
$1,101.60
(22.3%)
The Retirement Advisor Model Portfolios all began with $200,000 on 1/1/2007.

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The Retirement Advisor Model Portfolios all began with $200,000 on 1/1/2007