One of the most ominous market indicators has reared its ugly head this summer, flashing warning signs about the health of the U.S. stock market. The Hindenburg Omen is a highly technical indicator used to predict a major market crash.
It’s named after the infamous German aircraft that went up in flames in Lakehurst, New Jersey on May 6, 1937. The Hindenburg flight originated in Frankfurt, Germany and was generally considered a smooth ride, until unforeseen elements sparked a fire that quickly engulfed the craft while landing. Thirty-five of 97 passengers were killed. The tragedy, displayed on news reels across the world, destroyed public confidence about air travel. The exact cause remains a mystery to this day; much like its use as a stock market indicator.
There are varying definitions for what triggers the Hindenburg Omen. In this installment of Investing 101, we’re laying out the basic premise.
By all definitions, the NYSE Composite (^NYA) is used as the benchmark. It’s an index consisting of all common stocks listed on the New York Stock Exchange. Among the 2,000-plus listings, market analysts monitor four criteria that trigger a signal. Here they are in no specific order:
1) The daily number of stocks that hit 52-week highs AND the number of stocks that hit 52-week lows are both 2.2% or more than the sum of NYSE issues that rise or fall that day.
2) New 52-week highs cannot total more than twice the number of new 52-week lows.
3) The McClellan Oscillator, which measures the difference between the number of rising stocks versus the number of falling stocks, is negative.
4) The NYSE Index rises above its 10-week moving average –meaning it’s greater in value than it was 50 trading days ago.
If ALL of these measures are hit on the same day, we start to get nervous. If this occurs a second time, within a 30-day period, the Hindenburg Omen is triggered, and a serious stock market decline is expected to follow within the next 40 days. (Also of note, that 30-day time period varies among analysts. Some use a 36-day period, some use 30 calendar days, and others use 30 trading sessions.)
It’s extremely rare to see this omen flare up. Non-believers point out that it doesn’t always work. But true believers point to prior instances which include the 2007 meltdown and the tech bubble burst in 2000.
Whether you buy it or not, the signs are emerging and trading floors are buzzing. But only time will tell.