Tuesday , 25 June 2024

Dreaded "Hindenburg Omen" Indicator Suggests 77% Likelihood of Imminent Major Market Decline (+2K Views)

The Hindenburg Omen is a technical indicator that foreshadows not just a bear market but the likelihood of a stock-market crash – and it is now predicting a possible market meltdown in September! Words: 871

So say Steven Russolillo and Tomi Kilgore in an http://online.wsj.com article* entitled “‘Hindenburg Omen’ Flashes.” Below Lorimer Wilson presents further reformatted and edited [..] excerpts from the article for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) They go on to say:

The Origin of the Hindenberg Omen
Jim Miekka, a blind mathematician, came up with the “Omen” in 1995 as a way to predict big market downturns, developing a formula that parses data like 52-week stock levels and the moving averages of the New York Stock Exchange. The name “Hindenburg Omen” (named after the famous German airship that crashed in Lakehurst, N.J. in 1937) was coined by a fellow market technician, Kennedy Gammage, when he and Miekka found out the name “Titanic” already had been taken. Miekka currently writes a Wall Street newsletter called the “Sudbury Bull & Bear Report”.

The Implications of the Hindenberg Omen Occurring
The Hindenburg Omen occurs when a number of technical indicators align on the NYSE and has been behind every market crash since 1987. Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77% [conversely, 23% of the time no significant market downturn occurred] and usually took place within the next forty-days. The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%. The Omen was activated on the New York Stock Exchange on August 11 so the probability is that we will see a steep market decline sometime in September.

The indicator last occurred in October 2008, according to UBS AG, and was triggered a total of seven times in 2008 as the S&P 500 recorded its steepest annual drop since the Great Depression. The Hindenburg Omen was also reportedly triggered on June 13, June 21, and June 22, of 2007 near the top of U.S. equity markets.

The Criteria That Must be Met to Activate the Hindenberg Omen
1. All criteria must be met for a confirmed occurrence within the next 36 days. (One signal is usually an indication of a market top, but the Omen becomes more accurate when there are two or more close together.)
2. 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.
3. The smaller of the 52-week highs and lows must be greater than or equal to 79 (or 2.5% of 3,168 issues).
4. The NYSE’s 10-week moving average must be rising.
5. The McClellan Oscillator, a measure of market fluctuations, must be negative.
6. 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.)

The indicator denotes unhealthy internals in the marketplace, with a large number of stocks making both new highs and new lows. It suggests a lack of internal uniformity in the stock market and, therefore, a much higher than normal probability for a steep decline.

What Analysts Are Saying About the Hindenberg Omen
According to UBS technical analyst Michael Riesner, “It’s an interesting name but what you really have as a technical background is a classic distribution phase in the market,” Riesner said. “It’s the classic tug of war between bulls and bears that you have there.”

“The Hindenburg Omen does show some deteriorating internals, which signals some major concerns,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research, “but it isn’t a reason to move to 100% in cash. We’re taking a wait-and-see approach, but considering its recent history, we’re considering it more than other indicators.”

David Buik at BGC Partners describes the Omen as “easily the most feared technical pattern in all of chartism”. Ominously choosing Friday the 13th as the date on which he drew attention to the matter, Bulk warned that the technical outlook suggests a stock market collapse is imminent.

When asked by CNBC what his advice would be for traders, UBS’ Art Cashin said that investors should be “very cautious” because “there’s been a lot of buzz in the street about the Hindenburg Omen… It bears watching. It’s a warning… it isn’t confirmed, but we will know in the next 3 or 4 weeks.”

A confirmed Hindenburg Omen has occurred prior to every major stock market crash since 1987. In other words, if yesterday’s alignment is confirmed by another Hindenburg Omen in the next 36 days, it may be time to head for the hills – if you already haven’t.


Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The authors’ views and conclusions are unaltered.
Permission to reprint in whole or in part is permitted provided full credit is given.
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