Three Bad Omens for Stocks

The Hindenburg disaster happened over 76 years ago. But it's getting a lot of attention today...

 

The term "Hindenburg Omen" was named after the infamous 1937 crash of a German airship. Today, Wall Street uses it to describe a set of events that often occurs before the stock market crashes and burns.

 

We had three of these omens earlier this month.

 

Here's what has to happen in order to trigger a Hindenburg Omen...

 

1.	At least 2.8% of the NYSE is hitting new 52-week highs... and at least 2.8% of the NYSE is hitting new 52-week lows.
2.	The NYSE is higher than it was 50 days ago.
3.	The McClellan Oscillator is negative.
4.	The number of 52-week highs is not more than twice the number of new 52-week lows.

 

Once the omen is triggered, it's valid for 30 days. So if we're going to get a hard pullback in the stock market – as I've been arguing for the past couple months – then it ought to happen sometime in the next month.

 

Like most indicators, though, the omen doesn't have a perfect track record. There have been plenty of "false" signals over the past few years. And those false signals have a lot of folks dismissing the validity of last week's omens.

 

But here's the thing...

 

By itself, the Hindenburg Omen might not mean much because it triggers a lot of false signals. But when you get a cluster of Hindenburg Omen signals during a period of rising interest rates and NYSE margin levels hitting historic highs – like before the crashes in early 2000 and late 2007 – the Hindenburg Omen can be the third strike.

 

Every stock-market decline greater than 5% since 1985 has been preceded by a Hindenburg Omen. That's enough of a reason to be a little cautious right now.

 

Best regards and good trading,

 

Jeff Clark