Today the news came out that another Hindenberg Omen appeared on Wednesday 11th July 2007.
When I say another, it's the third signal I've heard of in recent weeks. For full analysis of this you can visit McHugh's Financial Markets Forecast & Analysis
For those of you who like me; and I've already put my hands up to this; are not chartists what exactly does this mean. Well according to the above site, it means a stronger indication of a significant stock market decline between now and October 2007.
What is a Hindenberg Omen?
Good question and I don't have the knowledge to answer that for you so I've found an explaination on another website from 2005 which hopefully helps and am posting a section from that webiste here with a link to the full article.
http://www.safehaven.com/article-3880.htm
It is the alignment of several technical factors that measure the underlying condition of the stock market - specifically the NYSE - such that the probability that a stock market crash occurs is higher than normal, and the probability of a severe decline is quite high. This Omen has appeared before all of the stock market crashes, or panic events, of the past 21 years. All of them. No panic sell-off occurred over the past 21 years without the presence of a Hindenburg Omen. The way Peter Eliades put it in a recent Daily Update, September 21, 2005 (Peter is well worth the read, believe me), "The rationale behind the indicator is that, under normal conditions, either a substantial number of stocks establish new annual highs or a large number set new lows - but not both." When both new highs and new lows are large, "it indicates the market is undergoing a period of extreme divergence — many stocks establishing new highs and many setting new lows as well. Such divergence is not usually conducive to future rising prices. A healthy market requires some semblance of internal uniformity, and it doesn't matter what direction that uniformity takes. Many new highs and very few lows is obviously bullish, but so is a great many new lows accompanied by few or no new highs. This is the condition that leads to important market bottoms."
I guess if you look at what has been happening in the US with the sub-prime lending market ie a lot of lenders going down due to bad debtors and with interest rates rising here in the UK there should be indications in the general economy that can signal this potential occurance.
Oh no but the economy is too buoyant and that's why interest rates are going up!, I hear you say............. I'd answer, wasn't that also the case in the 80's just before a major crash.
We can be a bit blinkered when the economy is running away with itself and see it as all good, but with borrowing at all time highs and a lot of that out of equity in properties, and re-posessions on the rise again, isn't negative equity the next thing around the corner.
Figures from the Council of Mortgage Lenders show that repossessions are at their highest level for seven years, having risen from 10,310 in 2005 to 17,000 in 2006, and research from Shelter reveals that a disproportionate number of recent repossessions have been initiated in the sub-prime sector, often on remortgages arranged to cover other debts.
In some areas granted, the housing market is still running at amazing levels, but there comes a day when interest rates reach the point where the squeeze starts and poeple can't afford to move up the ladder anymore, so a blip and a slow down starts, and some areas are already probably at their peak. Salaries have not gone up at the same rate as the cost of housing, so crunch point will happen eventually.
OK so crunch point may not be now, when these Hindenberg Omens are showing, but it will come one day as we all know and it could be 1 or even 3 years away, but it will come.
What does this have to do with my investment?
Well if you are invested in a company that you think can only forge ahead you might not think it will matter to you, but it will. If people go into a panic if a big sell off happens, they will create a situation where the brokers start to automatically knock percentages off all shares they deal with and so your investment may well go down even if it has huge potenial to rise. When I say investment, I mean in stocks and shares. Equally though if this does happen then, pensions, ISA's etc will also go down, but possibly the Gold (people hedging) and the Bonds market will increase, so I guess it just depends where your safe haven is.
I'm sure there will be more to write on this subject in coming weeks or months.