Thread: 'Hindenburg Omen' Sparks Stock Market Fears

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'Hindenburg Omen' Sparks Stock Market Fears


Updated: 12 minutes ago




(Aug. 13) -- Is the stock market on the verge of another crash?

If you believe in the so-called "Hindenburg Omen," an obscure technical analysis tool that proponents believe is uncannily effective at signaling the necessary preconditions, there is at least a 25 percent chance that such a significant drop is nigh. (And yes, the name is derived from the ill-fated dirigible that burst into spectacular flames and crashed back in 1937, killing 35 and taking down the entire zeppelin industry with it.)

Murray Becker, AP
The German zeppelin Hindenburg crashes to the ground, tail first, in flaming ruins after exploding.

As such, the more high-strung of the financial blogs have begun sounding the alarm. Zero Hedge was among the first to report on the appearance of the omen on Thursday after the market closed.

As Tyler Durden wrote, "It is time to batten down the hatches -- something big is coming." He also gave a quick summary of the Hindenburg Omen's "five criteria," or the observations that need to be made for it to be legitimate, noting that all five had occurred at Thursday's market close:

1. That the daily number of NYSE new 52-week highs and the daily number of new 52-week lows must both be greater than 2.2 percent of total NYSE issues traded that day.
2. That the smaller of these numbers is greater than or equal to 69 (68.772 is 2.2 percent of 3,126). This is not a rule but more like a checksum. This condition is a function of the 2.2 percent of the total issues.
3. That the NYSE 10-week moving average is rising.
4. That the McClellan Oscillator is negative on that same day.
5. That new 52-week highs cannot be more than twice the new 52-week lows (however, it is fine for new 52-week Lows to be more than double new 52-week Highs). This condition is absolutely mandatory. McHugh, Ph.D.

"McHugh, Ph.D." refers to Robert McHugh, Ph.D., president and CEO of Main Line Investors Inc., a registered investment adviser in Pennsylvania who has written extensively on the subject of the Hindenburg Omen, noting that it has been frighteningly accurate at predicting the stock market's decline of 15 percent or more:

All the biggies over the past 21 years were identified by this signal (as defined with our five conditions). It was present and accounted for a few weeks before the stock market crash of 1987, was there three trading days before the mini-crash panic of October 1989, showed up at the start of the 1990 recession, warned about trouble a few weeks prior to the L.T.C.M and Asian crises of 1998, announced that all was not right with the world after Y2K, telling us early 2000 was going to see a precipitous decline. The Hindenburg Omen gave us a three-month heads-up on 9/11, and told us we would see panic selling into an October 2002 low.

The problem? He wrote the above passage in 2006, after which no great sell-off, let alone a crash, occurred.

It's also worth pointing out here that while the omen has correctly predicted every big stock market swoon of the past two decades, including the terrible October 2008 decline that set the global economic recession into motion, not every Hindenburg Omen has been followed by a crash. Indeed, to resort to a geometry analogy: All rectangles are squares, but not all squares are rectangles. McHugh acknowledged as much in his 2006 report, writing, "Only one out of roughly 11.5 times will this signal fail."

Plus, it's not as though the recent Hindenburg sighting is the final word: The tool works only if the five market conditions are observed again within the next 36 days.

Still, the mere prospect of a successful prediction is plenty frightening, given the already fragile state of the world economy. Which is why otherwise more cautious financial blogs such as The Financial Times Alphaville have also quivered at the disconcerting news.

And of course, today Durden couldn't help but note the scarily coincidental date upon which all this Hindenburg discussion was taking place: Friday the 13th.