The stock market’s had another record-breaking year, but one technical pattern shows there could be signs of trouble ahead.
According to Tom McClellan author of McClellan Market Report, the threat of a Hindenburg Omen could be rearing its ugly head. The omen, which was created by mathematician Jim Miekka, is an indicator that technicians often use to predict stock market crashes.
In order for the Hindenburg Omen to hold true, says McClellan, three events must occur in the same day:
- The number of new 52-week highs and 52-week lows are greater than 2.8 percent of the advances and declines in the New York Stock Exchange.
- The NYSE Composite Index is above the level it was 50 trading days ago.
- The McClellan Oscillator (an indicator of whether a market is overbought or oversold) is below zero.
“If you get all of these events on the same day then we have this Hindenburg Omen. It’s good for 30 days, but it gets invalidated anytime the McClellan Oscillator goes back positive,” McClellan added. “We had one of those earlier this week, it was invalidated, and it looks like we will be getting another one [Thursday].”
McClellan admitted the Hindenburg Omen tends to call for trouble more often than we actually see trouble. “It does appear more often than the trouble actually shows up,” he said. “But it does have a good track record of appearing before every major decline. In fact we had one in September ahead of October’s decline,” McClellan noted. “Consider it a warning, not a guarantee.”
But there are two sides to every story and Kevin Caron of Stifel’s Washington Crossing Advisors sees little reason for concern.
Caron suggests investors look to earnings growth and the economy as gauge to where stocks will go next.
“We’re looking at a market that has benefited mostly from rising earnings. And we’re looking at a U.S. economy that is moving in the right direction,” he said. “I would say that for most investors out there, earnings and the direction of the economy are more important to be watching than a lot of short-term technical indicators.”