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One of the data points we follow to help us gain insight into the current condition of the stock market is called the Hindenburg Omen count. Originally created by James Miekka, its primary criteria is for at least 2.2% of stocks trading in the stock market to be both making new highs and new lows on the same days. Those days are tallied and looked at cumulatively to identify periods of divergence within a particular stock market index. The idea is that when you get disagreement within the stock market, it could mark a potential turning point. Below, is our version of Mikka’s indicator where we use a 1.75% threshold for those new highs and lows during a stock market uptrend. What we can see fairly clearly is that we had a large number of Hindenburg Omen days cluster around major historical market turning points. The last few months marks the largest argument that’s ever taken place within the Nasdaq index between stocks making new highs and those making new lows. Very interesting. We can also see that there were a number of false signals where we had those clusters without the markets subsequently turning meaningfully lower.

The takeaway here is to look at signals like this as a condition. It’s often required for major market breakages, but not sufficient in itself to cause or predict them. This is why we look at a number of market indicators to form a singularity of message with respect to the inherent risk in markets. I’ll add that a fair number of those indicators are singing the same tune at the moment. Not a good time to chase yesterday’s performance.

Editor’s Note: This article was originally published in the May 2024 edition of our “Cadence Clips” newsletter.

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