Stocks in Turmoil as Fifth Hindenburg Omen Appears

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If you just checked Tuesday’s closing numbers, it would seem like any other day. The Nasdaq Composite gained 0.5% while the S&P 500, NYSE Composite and the Dow Jones Industrial Average posted modest losses of 0.3% or less.

But such a cursory look at the market would miss some very serious action beneath the surface as the fifth Hindenburg Omen in six days appeared — a sign of ongoing deterioration in market breadth. At the lows, the Dow Jones was down more than 220 points before an epic intraday reversal by the bulls tried to hide it all under the rug.

NYSE

The day started out rough with big losses in the overnight futures session, led largely by a 5.4% drop in the Shanghai Composite as Chinese authorities try to reign in an out-of-control stock market bubble created by their recent interest rate cut.

That was the first easing action by the People’s Bank of China in two years, and it really got the animal spirits going with a surge of new brokerage account openings.

shanghai

Chinese stocks gained more than 27% from late November to the highs set earlier today before the sellers hit the tape, creating the worst one-day selloff in over five years. The initial turbulence was in the credit market, which was hit after officials increased the threshold for corporate bond eligible for collateral in bank funding operations. There also was chatter that Beijing could soon lower its official GDP growth target form 7.5% to 7%.

The negativity spilled over into the European session as political machinations in Greece could result in a snap election early next year that could see the anti-bailout Syriza party take control.

And finally, there is ongoing chatter that the Federal Reserve could scrap the “considerable time” language from its policy statement. In essence, this would wave a big red flag that the first interest rate hikes since 2006 are less than six months away.

All of this, plus the specter of more drama surrounding Thursday’s budget deadline in Washington, hit the market hard in areas such as high-yield bonds (which dropped below their mid-October lows on concerns over energy sector defaults resulting from the drop in oil prices), currency carry trades (especially the yen carry), and the CBOE Volatility Index (which hit highs not seen since October 27).

The midday rebound was largely driven by turnarounds in the most shorted stocks in the market, giving the impression that a short squeeze was engineered to save the day. But this wasn’t enough to mask the fact the fewer and fewer stocks are participating to the upside — a condition that has triggered the cluster of Hindenburg Omens. The last cluster was seen in September just as the 9%-plus stock market selloff was getting started.

You can see this dynamic in the chart comparing the NYSE New High vs. New Low Index against the S&P 500.

NYSE new highs new lows

There are other warning signs as well, from the weak performance of big-tech/new-tech stocks to the run into safe havens including Treasury bonds and gold.

For now, I continue to recommend positions such as the December $230 puts against Tesla Motors (TSLA) as shares look ready to collapse out of their two-year uptrend. The puts are up 177% for my Edge Prosubscribers over the last two days.

TSLA

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/hindenburg-omen-tsla/.

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