subject: Hindenburg Omen: Nostradamus Effect or Bull in a Bear Market? [print this page] Hindenburg Omen: Nostradamus Effect or Bull in a Bear Market?
Over the past couple of years, the term tumultuous has become almost synonymous with volatile market conditions. Perhaps more disturbing is the recent buzz surrounding the Hindenburg Omen, a supposed alignment of technical factors that measure the condition of the New York Stock Exchange.
The Hindenburg Omen, named after the German passenger airship that caught fire and was destroyed on May 6, 1937, is comprised of several technical indicators said to predict a stock market crash. The "omen," originated by Jim Miekka, a mathematician and former physics teacher, in 1985, came about as a way to predict big market downturns by utilizing a formula, which takes into account 52-week stock levels and moving averages of the New York Stock Exchange.
More specifically, the Hindenburg Omen requires the daily number of NYSE new 52-week highs and lows must both be greater than 2.2% of the total NYSE issues traded that day, with the exception that new 52-week highs cannot be more than twice the new 52-week lows. Another factor associated with the traditional definition of the omen is that the 10-week moving average of the NYSE must be rising. Additionally, the McClellan Oscillator, which evaluates the rate of money entering or leaving the market, indicating overbought or oversold conditions, must be negative on the same trading day.
According to The Wall Street Journal and Bloomberg, the criteria of the data used by the omen "was officially tripped this week," as "92 companies that hit new 52-week highs on Thursday, or 2.9% of all companies traded on the New York Stock Exchange." With 81 new 52-week lows, or 2.6% of NYSE's total companies, followed by a rising 10-week moving average, and a negative McClellan Oscillator, all occurring on August 12, 2010, many are questioning whether a stock market crash could occur in September.
Certainly, the Hindenburg Omen wouldn't even be granted any significance had it not had a stellar record since its inception. In fact, the associated indicators have reportedly been "behind every market crash since 1987, but also has occurred many other times without a big downturn following."
While market analysts have reported that the omen has led to stock market declines that can be considered as crashes in about 25% of instances, the appearance of these historically ominous indicators has believers, like Miekka, "dancing close to the door."
