The market continued to inhale and exhale yesterday. Pondering the alternatives, perhaps we should be thankful. From a hidden-pivot standpoint it was a case of rallies falling short of their modest targets and declines doing more or less the same. I had some bids in below the market in several of the mini-indexes, but sellers lacked whatever conviction it might have taken to get them filled.

Don’t they know about the Hindenburg Signal, named for the ill-fated dirigible? After giving a false alarm 18 months ago, it triggered again last week, announcing to all the world that a stock market crash has become relatively likely within the next 30 days. I received some supportive notes on this from some pen-pals, including my old PSE buddy Tom Tankka. He says “Hindenburg” has an awesome track record, but I’ve yet to verify this. Another friend, Larry Amernick of the sage Amernick Letter ,weighed in with some background material. He uses the Hindenburg Signal himself in a proprietary breadth oscillator. “It is nothing more than  Norman G. Fossback's High-Low Logic Index. Fossback invented this indicator in 1979,” Larry notes. “He describes it on pages 76-80 in his book Stock Market Logic (Dearborn Financial Publishing).”

All Signs Are There

More descriptive still is an advisory forwarded to me by subscriber Chris Myatt: “No newsletter tonight, but a Hindenburg Omen stock market crash signal was generated…, according to the official statistics per the Wall Street Journal as reported by Kennedy Gammage.  According to Kennedy, there were 78 New Lows and 167 New 52 week highs on the NYSE Tuesday, with total issues traded at 3,442.  This works out to a common new lows/new highs figure of 78, which when divided by 3,442 gets us above the 2.2 percent threshold, at 2.26 percent.  The other two conditions necessary for an official Hindenburg Omen stock market crash signal tonight are evident.  The 10 week moving average of the NYSE is rising, and the McClellan Oscillator is negative.

“What this means is that there is a high probability that a stock market crash is coming in the next 30 days, and likely sooner rather than later.  This is not a guarantee of one, but signals that the risk of one occurring is quite high.  The [Plunge Protection Team] will likely jump into action here and we will be able to observe two heavyweights trying their best to drive the market their way.  The PPT won back in April 2004, the last time we got such a signal.  That has not always been the case, and may not be so this time.  Please be alert with your long positions.  The signals remain valid for 30 days.  More confirming Hindenburg Omens are possible, and normal.

“This confirms the University of Michigan Consumer Sentiment stock market crash signal we got on Friday.  Again, these are crash-risk signals, not a guarantee.  The Omen and Michigan Sentiment signals mean we have gone from orange alert to red.  Purple would be the meltdown is underway, to apply the color scheme the government's NOAA uses to classify geomagnetic solar storms for our purposes.”

Chicken-Little Mode

Readers? My experience is that the more widely watched an indicator, the less likely that indicator is to predict some very dramatic event correctly. In fact, I can’t recall a single instance of a market crash having been accurately predicted – other than retrospectively, of course, by every Tom, Dick and Harry claiming to be a technician, or by broken-clock forecasters who have been stuck in Chicken Little mode for the last 25 years.

That said, my gut feeling is that stocks are on very thin ice right now, and a crash would therefore come as no great surprise. On the other hand, it sometimes feels as though, absent a spectacular exogenous shock – more spectacular, that is, than the one-two wallop of Katrina and Rita -- the stock market could remain buoyant indefinitely. After all, this bull is sustained, if you please, not by common sense or by a decision-making process that could be described as rational or even human, but rather by a steady and so far unflinching flow of Other People’s Money into shares. Having savored the 20%-plus returns of the dot-com years, investors have yet to reconcile themselves to a new era in which a safe 2-3% might be the best they can do. This attitude has kept investment dollars flowing into the stock market, which, abetted by dumbfounding complacency, is having little trouble sustaining altitude. More gyroscope than perpetual motion machine, the market might be expected to perform effortlessly until the Earth tilts off its axis.