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Stocks Bounce as ‘Hindenburg Omen’ Strikes

The Dow Jones Industrial Average gained 0.6% to close at a new record high on Tuesday, once again testing the 17,900 level that it’s been trying to chew through for the last three weeks.

The catalyst for the rebound was a better than expected October construction spending report and solid auto sales numbers. Thanks to government outlays, construction spending increased 1.1% versus the -0.1% decline in September and the 0.5% consensus estimate.

In corporate news, struggling electronics retailer RadioShack Corporation (RSH) dropped 20% before finishing with a 8.1% loss on news it had violated a debt covenant as financial troubles accumulate.

On the surface, it looks like the selling pressure that appeared on Friday and continued into Monday — driven by the fallout from collapse in crude oil prices to five-year lows following the “no production cut” decision from OPEC oil ministers last week — has disappeared as quickly as it appeared.

After all, the S&P 500 gained 0.6% to move back over its five-day moving average, a level that it stayed above for 29 consecutive days through last Wednesday in what was the longest run above that level in history.


But looks are deceiving as something known as the “Hindenburg Omen” has flashed a big red warning signal.

Created by James Miekka, the Omen warns of possible market weakness based on a breakdown in internal market breadth despite overall market gains. This is triggered by a rise in new lows and declining issues in combination with a decline in the number of advancing issues.

The last time the Omen was triggered was back in September ahead of a two-month decline that dropped the Dow nearly 8% and hit small cap stocks with a 12% drop.


While this is no guarantee of a selloff here, it’s notable that aside from the strength in a select group of very large stocks, a broad swatch of the market is simply not participating to the upside. You can see this in the way the Russell 2000 remains well below its September and November highs, which in turn are below the highs set in March and July.


For now, I’m watching for short-term weakness in stocks like Twitter Inc (TWTR) as well as mega-cap bank stocks including Bank of America Corp (BAC) and have recommended Edge Pro subscribers take appropriate action.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.

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