The Omen triggered on August 12, when a relatively large number of stocks hit the new high list at the same time that a lot of other stocks were making new lows. This divergence of behavior is said to describe a “confused” market and is thought to foreshadow an upcoming market meltdown. In fact, the Omen did trigger ahead of stock market panics in 2008, 2000, 1987, and 1974. However, the Omen also warned of meltdowns 45 times in the past 50 years. An Omen that triggers roughly once a year is bound to have a pretty good track record of predicting disaster, if you ignore the years when a market meltdown failed to show up.
The point that an unstable tape is often a precursor to a financial panic is a lesson worth remembering, but it is not a particularly reliable indicator in and of itself.
Ned Davis Research issued a report that I used to prepare this note. In it, NDR reports that when the Omen triggered in early August, the types of stocks making up the “new high” list were largely closed-end bond funds and Exchange Traded Funds and other non-operating company issues. We did not really have a situation where half of the normal stocks were going up, while the other half was falling like a rock. In general, the market was weak that day. A rally in the bond market sent these special issues up to new highs, but the general stock market was not, itself, “conflicted.”
Since the Omen triggered, the market has fallen some, before rallying strongly yesterday (September 1). Is the market conflicted? I dunno. Lacking self-esteem? I wouldn’t venture a guess. Feeling “guilty” about how it is treating investors? Definitely not. Is it manic-depressive? To the core.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .
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