Diversions August 19, 2010

Hindenburg Omen Flares Up

You may have heard about the Super Bowl Indicator, and the “January Effect”, but another stock market indicator has resurfaced with ominous portents. 

 

Reported by

This indicator is called the “Hindenburg Omen”, and yes, it was named after the famous German zeppelin that ignited and crashed in Lakehurst, New Jersey in 1937.  And yes, it supposedly foreshadows not just a mere correction or bear market, but a full-fledged stock market crash.  And yes, that indicator suggests that we could be looking at a potential market meltdown next month. 

 

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

What Has to Happen 

 

According to the Wall Street Journal, all of the following criteria must be met for a confirmed occurrence of the Omen: 

 

  • The daily number of new NYSE 52-week highs and the daily number of new 52-week lows must both be greater than 2.5% of the total issues traded that day. 
  • The smaller of the 52-week highs and lows must be greater than or equal to 79 (or 2.5% of 3,168 issues).  
  • The NYSE’s 10-week moving average must be rising. 
  • The McClellan Oscillator, a measure of market fluctuations, must be negative. 
  • New 52-week highs can’t be more than twice the new 52-week lows. (However, it is acceptable for the new 52-week lows to be more than double the 52-week highs.) 

 

Now, as convoluted as that sounds, the Wall Street Journal notes that the criteria was met last week; there were 92 companies that hit new 52-week highs last Thursday (2.9% of all companies traded on the New York Stock Exchange), and there were also 81 new lows, or 2.6% of the total.  The rationale, by the way, is that under “normal conditions” either a substantial number of stocks may set new annual highs or lows, but not both at the same time – and the simultaneous occurrence of many new highs and lows may signal trouble. 

 

Does it work?  Well, Wikipedia notes that every NYSE crash since 1985 has been preceded by a Hindenburg Omen, and of the previous 25 confirmed signals, only two (8%) have failed to predict at least mild (2.0% to 4.9%) declines.  The Wall Street Journal notes that “the Omen”was behind every market crash since 1987, but also has occurred many other times without an ensuing significant downturn.   

 

One other interesting piece of trivia; Miekka told the WSJ that the Hindenburg name was coined by a fellow market technician, Kennedy Gammage – when they found out the name they had planned to use – “Titanic” – had already been taken. 

«