Trading in U.S. equity markets last Friday triggered speculation among technical analysts that a “Hindenburg Omen” event occurred. A Hindenburg Omen is a rare technical event that frequently signals that a major stock market tumble has started. The omen is triggered when multiple stocks on the New York Exchange simultaneously set new highs and new lows. The phenomenon happens if both highs and lows are greater than 2.8 per cent of total issues that trade that day. According to CNBC, that translates into about 73 stocks each way. According to Thomson Reuters, there were 156 new lows and 90 new highs recorded on Friday.
In addition to its statistical requirement, a Hindenburg Omen is a rare event because it happens only after U.S. equity indices have reached an intermediate peak, and only when equity index volatility is rising. Both of these conditions were satisfied on Friday. U.S. equity markets peaked on May 22 on another technical indicator, a relatively rare bearish key reversal pattern. Since May 22 the VIX indicator – better known as the “fear index” – jumped 27 per cent, including a 12 per cent increase on Friday. On Friday the Dow Jones Industrial Average plunged 209 points.
The peak in U.S. equity indices was triggered by more than a bearish key reversal by the Dow Jones Industrial Average and S&P 500 Index. May 22 was the day that U.S. Federal Reserve Chairman Ben Bernanke hinted the Fed was planning an eventual slowdown of its current Quantitative Easing (QE3) program. The media has designated this plan the dreaded “tapering” event. Downside reaction by equity markets came quickly, and for good reason. When QE1 ended in the spring of 2010, the S&P 500 Index dropped 17 per cent during the next three months. When QE2 ended in spring of 2011, the S&P 500 Index plunged 20 per cent during the next three months.
Downside technical action was triggered on a wide variety of U.S. sectors on Friday. Sectors and their related exchange traded funds that broke below their 20 day moving average included Technology (XLK $31.66 U.S.), Materials (XLB $40.30), Consumer Discretionary (XLY $56.12) and Energy (XLE $80.50). Look for additional seasonal weakness between now and the end of October.
Their weakness follows an historic pattern. According to Thackray’s 2013 Investor’s Guide, during the past 62 periods June is the second worst performing month in the year for the Dow Jones Industrial Average and the TSX Composite Index and the third worst performing month for the S&P 500 Index. The worst-performing U.S. sectors in the month of June in their order of significance were Materials, Financials, Consumer Discretionary, Industrials and Energy.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. Daily reports are available at http://www.timingthemarket.ca/. He is also a research analyst for Horizons Investment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management.