Hindenburg Omen Redux, How Dire Is It Anyway?

asiablues's picture

By Dian L. Chu, Economic Forecasts & Opinions

The Hindenburg Omen was triggered again last week, as reported by the WSJ MarketBeat. This is the second time this month since its first occurrence on Aug. 12. For those not familiar with the term, the Hindenburg Omen is essentially a combination of four bearish technical indicators on the NYSE occurring on the same day, which would signal increased probability of a stock market crash. 

Wall Street is quite abuzz since the Omen seems to have a pretty good track record as Wikipedia documented the probability of greater than 5% downside after a confirmed Hindenburg Omen was 77% within the next forty days.  But before everyone goes running for the exit, the probability of a major stock market crash was only 24%, and it would also help to take a closer look at the significance of the Hindenburg Omen itself.

Although Jim Miekka, a blind former physics teacher living in Florida, is said to be the creator, the Hindenburg Omen is largely based on Norman G. Fosback's High Low Logic Index (HLLI). In an article dated Aug. 24, Mr. Mark Hulbert at MarketWatch recounted a discussion with Mr. Fosback that HILI mainly focuses on the lower of new 52-week highs and new 52-week lows amounted to at least 5%--vs. the 2.5% applied in the Hindenburg Omen--of the sum traded on the NYSE. Fosback believes "this lower cutoff is way too low to be considered bearish."

Another issue, as pointed out by Hulbert, is that the highs and lows numbers are somewhat distorted because many stocks traded on the NYSE are non-operating companies. Hulbert cited findings from Ned Davis Research that excluding non-common stocks on the NYSE, the Hindenburg Omen would not have been tripped, as the new 52-week highs ratio would have been just 0.4% on Aug. 12. 

There's also lack of clear definition as to how many stocks have to reach their highs and/or lows to qualify as the Omen.  Other critics believe the Hindenburg Omen may simply be a case of data-mining and overfitting of seemingly random criteria.

My take is that the convergence of several bearish technical signals is a manifestation of the current heightened market risks and volatility stemmed primarily from the economic uncertainty after the global financial crisis, instead of a "leading indicator" for some significant market event.  However, since the Hindenburg Omen seems to have many market followers, the typical traders’ “trend trading” could make it into a self-fulfilling prophecy, thus potentially reinforcing the Omen.

So, what should investors do with the second rising of the Hindenburg Omen? The advice from the two creators--Fosback and Miekka—could provide some clues.

According to Hulbert,

"[Fosback] said, his reading of the historical data suggests to him that the current new high/new low data are solidly in the "neutral" category. (Because of other indicators entirely, furthermore, Fosback is quite bullish on the stock market right now.)"

As for Miekka, the WSJ reported that although he thinks there could be a 20% correction into the fall, but he would be buying at a lower price, and may look to short NASDAQ stock index futures "in the next few weeks", depending on the technicals.

For investors with a longer time horizon and balanced portfolio allocation, I don't believe there’s anything wrong with these strategies.

Dian L. Chu, Aug. 24, 2010

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mt paul's picture

i'll take a hinden burger

with a side order

of omen rings ...

carbonmutant's picture

+10

 I'm stealing this...

dcb's picture

posted this chart on this site for any and all a good month ago

http://www.freestockcharts.com/?emailChartID=b5fa3363-a4e1-49b6-83f8-02a148816c07

if that is trouble go to thishttp://www.freestockcharts.com?emailChartID=de16ae2a-2ee2-48b8-85ca-8a839ea669ec

and go to the s and p chart (GSP)

I put my money where my mouth is.

Bankster T Cubed's picture

please

the situation we're in is freakish

the markets WILL crash, that much is certain

the question is when, not if, and all discussion about "how the hindenburg doesn't mean the market will crash" is bull sophistry

Beard of Zeus's picture

Constant discussion of HO is self-fulfilling.

NotApplicable's picture

And then the MSM can blame Miekka for the entire crash.

Brilliant!

MayIMommaDogFace2theBananaPatch's picture

There is something ironic about a blind-man informing the world about what he "sees" coming.  BUT, it is an irony that I can really appreciate at this time in history...

johngaltfla's picture

From a technical point of view, the "Death Crosses" we have seen in the markets at a lower level than the December 2007 crosses is much more ominous. If you look at the breakdown of the leading financials (GS,JPM,BAC,WFC,MS) then the other indices, there is every chance, IMHO, of a 40-50% decline from these levels not just based on these moves, but on the fundamentals which could provide a backstop were they solid but instead are deteriorating at a faster pace than the equity markets themselves indicate.

 

bullchit's picture

Thought they got you for sure that time TD. 

What's "Guru mediation"?

Regards.

covert's picture

maybe all stock markets of the world will crash and burn. maybe stock is the way of the past.

http://covert2.wordpress.com

 

Beard of Zeus's picture

Gold is the way of the future bitchez.

RockyRacoon's picture

Gold never goes to zero.  Besides it makes a great boat anchor if needed.

vote_libertarian_party's picture

uhhhh...why is it a big deal that equities go down 5%?  We seem to be going up and down 5% on a weekly basis.

septicshock's picture

5 percent is like a piss in the ocean... Hell, we already had the five percent drop. Don't get me wrong, I think the market is going to crash... But not because of some omen and stupid technicals. Seriously, if all it took to make money was follow the technicals, every moron and their mother would be making a killing.

Rasna's picture

It only "works" if no one is aware of the "omen"... If everyone is aware and talking about it then it has little meaning... For me, I'm on my way to Delphi...

Talk to the Oracle, Bitchez

tmosley's picture

The HO isn't so much a chart pattern like TA, but more of a measure of investor confusion.  Many new highs+many new lows means investors are moving in and out of stocks.  It means people don't have faith.  As such, there is a much higher likelihood of a market crash.  The HO is as much of a technical indicator as unemployment returns or durable goods orders.

Citxmech's picture

It's a big deal because there's also a 24% chance of a "market crash."

BeerGoggles's picture

The Hindenburg Omen - what  load of tosh. So if I add 2 sugars to my coffee, will that tip the market over?

Sudden Debt's picture

if you add milk, then yes it will.

BUTTERFLY EFFECT MAN!

ATG's picture

HO gave yet another signal yesterday after several the last fortnight.

SPX down -6% since the first HO, maybe headed to 1010 first stop target.

http://stockcharts.com/charts/gallery.html?s=spx

Most weather forecasters might do better looking out the window.

Most market forecasters might do better looking at what the market is doing...