If you’ve been listening to the media lately you may have heard something about the Hindenburg Omen. It sounds kind of ominous, and I guess it should because it predicts a severe market crash. The Omen has been behind every market crash since 1987, but significant stock-market declines have followed only 25% of the time. So there’s a high likelihood that the Omen could be nothing more than a false signal.
Who is Behind This Technical Indicator?
The Hindenburg Omen (not originally given that name) was dreamed up by Jim Miekka, a blind mathematician who edits a newsletter called the Sudbury Bull & Bear Report. Though Miekka put this out there a number of decades ago, it stems from an indicator called the High Low Logic Index, which Norman Fosback, editor of Fosback’s Fund Forecaster, devised in the 1970s.
Miekka himself likens the appearance of the Hindenburg Omen to a funnel cloud sighting. Not all funnel clouds turn into tornadoes, but all tornadoes come from a funnel cloud. So, if you see a funnel, there’s a strong possibility of a tornado forming. He says the omen is the same, and while it may not mean a devastating market crash is certain, but it’s like an ominous storm cloud that signal a crash is possible.
The market saw the Hindenburg Omen tripped back on August 12, and again just last Friday (August 20). Because of this, Miekka acknowledged he has pulled out of stocks entirely.
How the Hindenburg Omen is Calculated
The Hindenburg Omen is calculated using data from the Wall Street Journal. It makes sense to use one data source so that you’re comparing apples to apples, but other sources can be used. The criteria for the Hindenburg Omen is:
- The daily number of NYSE new 52 week highs and the daily number of new 52 week lows are both greater than or equal to 2.8 percent (typically, 84) of the sum of NYSE issues that advance or decline that day (typically, around 3000).
- The NYSE index is greater in value than it was 50 trading days ago. Originally, this was expressed as a rising 10 week moving average, but the new rule is more relevant to the daily data used to look at new highs and lows.
- The McClellan Oscillator is negative on the same day.
- New 52 week highs cannot be more than twice the new 52 week lows (though new 52 week lows may be more than double new highs).
What Do You Think?
So, where do you stand? Is this just a fancy way to play with numbers and get the media buzzing, or is there some still unknown science behind this that means we should really buckle up for a rough ride? Personally, I’m a bit torn. On one hand it’s hard to deny the fact that the omen was behind the market crashes in recent history, but at the same time it has only accurately predicted significant crashes 25% of the time. So, this may certainly mean we’re in for a downturn, there’s also a greater possibility based on historical accuracy that it won’t indicate a full-blown crash.
The real problem is that things like this often turn into a self-fulfilling prophecy. A relatively benign technical indicator shows up and people start talking about it. Then more people begin believing what it is predicting, so they start selling off their stock. This creates downward pressure in the market that just reinforces the fears that others might have, so they too sell. Before you know it, a snowball effect has started and in the end people make the omen come true on their own. We all know how irrational most investors can be, so that’s the real danger in my opinion.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.