Hindenburg Alarm: Another Rotation or Worse?

In early November, we sounded the alarm about a recent Hindenburg Omen. Per the Commentary’s summary:

Bottom line: market breadth is horrendous and will likely lead to a rotation favoring out-of-favor sectors and stocks. Thus, it’s not surprising that the Hindenburg Omen was triggered. If we continue to see more of these Omens, the threat of a drawdown grows.

At the time, Mega-Cap stocks were grossly outperforming the market, while many sectors lagged the market. Since that Hindenburg Alarm, our expectations have come to fruition. We have, in fact, seen a “rotation favoring out-of-favor sectors and stocks.” The graphic below shows the significant change in fortunes between sectors. The first column shows each sector’s excess returns (vs. the S&P 500) since the Hindenburg Omen on October 29th. The second column shows the excess returns over the 50-day period preceding the alarm.

The Hindenburg Omen has sent 6 alarms over the last month. The last batch of Hindenburg alarms signaled drawdowns in the leaders and strong performance in the laggards. Is this Hindenburg Alarm signaling a rotation back to large-cap growth? Or might it be more ominous for the entire market? The last time this technical indicator triggered six times in a month was preceding the Pandemic crash of 2020, as we share in the Tweet of the Day.

What To Watch Today

Earnings

Economy

Inflation & The Dollar- Can These Earnings Tailwinds Continue?

Wall Street is forecasting a resurgence in earnings growth for the large majority of non-mega-cap S&P 500 stocks. Before blindly assuming that will be the case its worth understanding what drives earnings. Earnings are the results of sales. For many companies, sales are primarily a function of economic activity. However, as we share below, courtesy of Goldman Sachs, inflation and changes in the dollar also play meaningful, often underappreciated roles.

As shown below, inflation above pre-pandemic levels has boosted sales growth by approximately 2-3% over the past two years. Furthermore, the weakening dollar has benefited sales over the last three quarters. Looking ahead at sales and ultimately earnings, we must consider that inflation is showing signs of returning to pre-pandemic levels, and the dollar appears to be stabilizing. Assuming inflation continues to decline to the Fed’s 2% target and the dollar remains flat or even appreciates, as we suspect it may, earnings forecasts face a headwind that Wall Street analysts may not have factored in when making their optimistic beginning-of-year projections.

Tweet of the Day

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