I haven’t written much about the stock market yet on this site, but I’ll put forth some commentary (for informational purposes only) on those occasions where a potential major event is on the horizon. This is one such time, for there is a confirmed Hindenburg Omen on the clock.
What is a Hindenburg Omen?
The Hindenburg Omen is a little-known technical indicator that was created by Jim Miekka (and enhanced by Robert McHugh) to warn investors of an approaching crash in the equity markets. The H.O., on those rare times it is even mentioned, has been maligned by those with vested interests in the mainstream financial press, Therefore we should give it serious consideration as a useful tool in our trader’s toolbox. I have used it in the past to help determine when a given market has become frothy, as our current one seems.
When a Hindenburg Omen is triggered, there is an approximately 30% chance of a major decline to come in the ensuing four months from the date the H.O. is confirmed with a second instance.
Hindenburg Omen Criteria
Here is the official definition as defined by Miekka:
- Both New 52-Week Highs and New 52-Week Lows (as shown in the Wall Street Journal) of New York Stock Exchange listed companies have to exceed #2.2% of the total companies listed. This shows indecision in the markets. A healthy bull market tends not to have many New Lows – the rising tide usually lifts all boats.
- The McClellan Oscillator must be negative on the same day as #1 above. The McClellan is another market breadth signal.
- The index must be trading higher than its 50-day Simple Moving Average. This shows divergence between the broader market while the breadth indicators of 1 and 2 above are showing that too many chiefs and not enough Indians are leading the bull’s charge.
McHugh added two more criteria that strengthens the Hindenburg signal:
- There has to be a second Hindenburg Omen within 36 days of the first signal. More Omens increases the likelihood of a crash. Think of it like a cluster of earthquakes; the more precursors, the greater chance of a giant quake.
- The New Highs listed in 1 above can be no more than 2x the New Lows. But New Lows can be more than twice the New Highs.
How Accurate is the Hindenburg Omen?
The most important thing to know is that it has preceded every major sell-off (with one exception – 2011) in the stock market in the past 30+ years. There is almost no chance of a crash happening without a confirmed Hindenburg.
Now this does not mean an H.O. guarantees a crash. But it greatly increases the chances.
From Robert McHugh’s Research:
Based upon the five parameters noted above, here’s what I found: Confirmed
Hindenburg Omens are very rare. There have been only 43 confirmed Hindenburg
Omen signals over the past 32 years. May 31st, 2017’s is the 43rd. This is amazing when
you consider that during that time span, there were roughly 8,000 trading days. Of those
8,000 trading days where it was possible to generate a confirmed official Hindenburg
Omen, only 261 (3.26 percent) generated one, clustering into 43 confirmed potential
stock market crash signals. This is a very rare alignment, a rare but potentially dangerous
condition in the stock market.
If we define a crash as a 15% decline, of the previous 42 confirmed Hindenburg Omen
signals, 9 (21.4 percent) were followed by financial system threatening, life-as-we-know-it
threatening stock market crashes ( I included the Crash of August 2015 which saw a
14.79% plunge from the date of the H.O. observation because the actual drop from the
highs just after the H.O. was 15.28%). Four (9.5 percent) more were followed by stock
market selling panics (10% to 14.9% declines). Five more (11.9 percent) resulted in sharp
declines (8% to 9.9% drops). Six (14.3 percent) were followed by meaningful declines
(5% to 7.9%), eleven (26.2 percent) saw mild declines (2.0% to 4.9%), and seven (16.7
percent) were failures, with subsequent declines of 2.0% or less.
Put another way, there is a 21.4 percent probability that a stock market crash — the big one — will occur after we get a confirmed (more than one in a cluster) Hindenburg Omen. There is a 30.9
percent probability that at least a panic sell-off will occur (a decline greater than 10
percent). There is a 42.8 percent probability that a sharp decline greater than 8.0 %
will occur, and there is a 57.1 percent probability that a stock market decline of at least
5 percent will occur. Only one out of roughly 6 times will this signal fail.
Don’t Be Han Solo – You Should Know These Odds.
So basically there is a 1 in 8,000 chance of a crash kicking off without a confirmed Hindenburg Omen on any given trading day; a 0.013% chance. But if there is one “on the clock” the chances of a 10%+ market crash within 120 days rises to 30.96%. That is a more than 250x increase in the odds of a meltdown, or from 1/8000 to 1/3.
Consider also that the 120 day clock takes us squarely into the August-October period which has historically been when the vast majority of crashes occur.
I don’t know about you, but if you play the markets, that’s an incredibly important filter for whether you should stay long, sit on the sidelines, or go short. Let the financial media pump-monkeys dismiss this indicator at their own peril, not yours.
I will write more about the potential of a crash (using other technical analysis) in the coming days. As I said this is NOT investing advice, but it is pertinent information that is not broadly disseminated that you as an investor should know so that you can make an informed decision with your finances.
And for the love of God, please someone tell President Trump to stop taking credit for a stock market surge that may well soon end in a crash. The Swamp Creatures would love nothing more than to pin a bad economy on him.