If we didn’t have enough to worry about a reminder that a technical analysis pattern called the Hindenburg Omen suddenly popped up a week ago that is said to indicate a major stock market crash. Basically the theory is that under normal conditions the stock market may establish either substantial new highs or new lows but not at the same time. When that happens it indicates the probability of a market crash. Probability and not a certainty is the key word.
This news comes prior to the recent surprise closing of one of the nation’s largest hedge funds headed by Stanley Druckenmiller, a protégée of George Soros and engineer of the currency coup that almost broke the bank of England when he shorted the British pound. Druckenmiller wrote his clients a farewell note, bid them well and thanked them for their 30 years of trust. He said they would be receiving their money as the hedge fund liquidated its positions. The fund is down year to date about 5%.
The stunning part is that Druckenmiller’s fund is not a small start up but a substantial 12 billion dollar entity with an enviable track record and a manager who made money for his clients in 08 while most others did not. So why is Druckenmiller closing? The reason is even more ominous per Minyanville founder Todd Harrison as he sees this and other hedge firms ‘going dark’. Going Dark is simply that the smart money does not see making money in the markets over the next five to six years and fund managers prefer to do something fun with the money they have then work to try and make more. And, as I reported in TWTW blog, Harrison and company have no solution for what is on the horizon. No one it seems knows what is going to happen and they all fear the worst.
David Callaway in MarketWatch.com reported in August 19th column that as far back as 2004 investors and traders were ‘counting their blessings and profits, and saying, “when this thing finally ends it’s going to be ugly.” It was no surprise to them when in 2008 the markets collapsed.
Those now leaving the business know something and what they know, it seems, is that the bubble most certainly to burst is the bond sector. All this news is connected to the Hindenburg Omen.
Or is it? There are other reasons a-foot, Watson. According to Pensions & Investments hedge fund closings have surpassed debuts for the second year in a row. Omen-schmoomen, performance also fell with the average fund –19.29% in 2009. Toss in greater regulation by the Feds and a clientele looking to make money with little long term customer loyalty and you have a recipe why hedge funds are becoming extinct.
The answer to the slow demise of hedge funds is that with tighter restrictions, negative markets, more transparency and an eagerness to find and jail white collar criminals by regulators the fund management world is not worth the effort as it once was.
Technical analyst Michael Kahn, in his August 18th, at Barrons on-line, reported that before anyone panics on the Omen there are some facts missing from the story. He writes that analysts cannot even agree that there was a signal indicating the doom at all last week. He went on to write that some folk meddled with the composition of the NYSE-traded issues and there was wide disagreement even on the day the signal fired.
Stocks, Kahn writes, are in the weak part of the seasonal cycle. The environment is weak for stocks plus there is the four-year presidential election cycle which suggests a major low is due in October of this year. Stocks are also fighting the bond and a floundering crude oil markets. So while Kahn is not panicking yet he is keeping the ‘door’ open for other technical evidence just in case. He finishes by offering, ‘A cluster of Omens would just make the bearish case stronger.’
There you have it. Someone with time on their hands added up the numbers and suggested a major meltdown in the offing. As yet that doesn’t seem to be the case but the case for stocks certainly appears dour.
If you have questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.
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