Hindenburg Omen

The Hindenburg Omen is a technical analysis pattern that is said to portend a stock market crash. It is named after the Hindenburg disaster of May 6, 1937, in which the German Zeppelin Hindenburg crashed and burned.

History

The Omen is largely based on Norman G. Fosback's High Low Logic Index (HLLI).^[1] The value of the HLLI is the lesser of the NYSE new highs or new lows divided by the number of NYSE issues traded, smoothed by an appropriate exponential moving average. The Omen itself is said to have originated with Jim Miekka,^[2] and the name was suggested by the late Kennedy Gammage.

Mechanics

The Hindenburg Omen is a combination of technical factors that attempt to measure the health of the NYSE, and by extension, the stock market as a whole. The goal of the indicator is to signal increased probability of a stock market crash.

The rationale is that under "normal conditions" either a substantial number of stocks may set new annual highs or annual lows, but not both at the same time. As a healthy market possesses a degree of uniformity, whether up or down, the simultaneous presence of many new highs and lows may signal trouble.

Theoretically, the Hindenburg Omen could be applied to any stock exchange. However, some minor alterations to the omen might be needed to achieve similar results.

Criteria

These criteria are calculated daily using Wall Street Journal figures for consistency. (Other exchanges may be used as well.) Some have been recalibrated by Miekka to reduce statistical noise and make the indicator a more reliable predictor of a future decline.

1. The daily number of NYSE new 52 week highs and the daily number of new 52 week lows are both greater than or equal to 2.8 percent (this is typically about 84 stocks) of the sum of NYSE issues that advance or decline that day (typically, around 3000).^[2] An older version of the indicator used a threshold of 2.5 percent of total issues traded (approximately 80 of 3200 in today's market).
2. The NYSE index is greater in value than it was 50 trading days ago. Originally, this was expressed as a rising 10 week moving average, but the new rule is more relevant to the daily data used to look at new highs and lows.
3. The McClellan Oscillator is negative on the same day.
4. New 52 week highs cannot be more than twice the new 52 week lows (though new 52 week lows may be more than double new highs).

The traditional definition requires each condition to occur on the same day. Once the signal has occurred, it is valid for 30 days, and any additional signals given during the 30-day period should be ignored. During the 30 days, the signal is activated whenever the McClellan Oscillator is negative, but deactivated whenever it is positive.^[2]

Some users of the omen may choose to view the 30 day limit as "working days" and not "calendar days". This is reasonable as the global finance market works on a weekday (Monday to Friday) schedule—leaving about 100 hours where only limited sharemarket trading takes place. This only extends the omen's warning by an extra 10 days, a reasonable limit.

Possible weaknesses

Structural: New highs and lows are being affected by ETFs. The last two times Hindenburg triggered was due to Bond ETFs making new highs or lows. If ETFs were removed, Hindenburg would not have triggered. When the Omen was originally designed there were no ETFs, so triggering behaviour in the 2010s is not the same as in the 1990s to mid-2000s.

Theoretical: It is theoretically possible for those with unlimited financial resources and minimally regulated automated trading systems to keep the omen from triggering. This has been postulated by the creator of the "Vergulde Draeck" Omen.

Triggering: To eliminate false positives some technical analysts have imposed the condition that the Hindenburg Omen

• must be triggered three times in a row within a month from the first triggering event for said initial trigger signal to be considered to be valid (i.e. requires double confirmation)
• is only valid when "all tightly coupled triggerings are within a fortnight"
• will indicate a possible future downturn or correction, depending on the magnitude of any "one off" triggering

Conclusions

From historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77% [The Wall Street Journal 8/23/2010 article cited below states that accuracy is 25%, looking at period from 1985], and usually takes place within the next forty days. The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%. Though the Omen does not have a 100% success rate, every NYSE crash since 1985 has been preceded by a Hindenburg Omen. Of the previous 25 confirmed signals only two (8%) have failed to predict at least mild (2.0% to 4.9%) declines.

Because of the specific and seemingly random nature of the Hindenburg Omen criteria, the phenomenon may be simply a case of overfitting. That is, by backtesting through a large data set with many different variables, correlations can be found that do not really have predictive significance. The Omen is at best an imperfect technical indicator that is a work in progress.

Recent occurrences

The omen has not been triggered in 2011. The United States debt-ceiling crisis did not trigger it. Nor did the United States federal government credit-rating downgrade trigger the omen either. However, lack of triggering during a US market crisis conditions may mean multiple omen triggerings in future.

• August 12, 2010: The Omen's creator, Jim Miekka, considered the Omen officially triggered on this date with 92 and 81 new 52-week highs and lows, respectively. The McClellan Oscillator was a negative -120.03 and the 10-week NYSE moving average was rising; the market closed above its open of 50 days prior (May 27).^[3] In the ensuing week, the Omen narrowly missed confirmation twice (August 13 and 19).

• August 20, 2010: According to the Wall Street Journal, the omen was confirmed on Friday, with 83 new 52-week highs and 95 new 52-week lows on the NYSE. The McClellan Oscillator was a negative -106.46 and the 10-week NYSE moving average was rising; the market closed above its open of 50 days prior (June 11).^[4]

• August 24, 2010: 166 New Lows, 87 new Highs, McClellan Oscillator was negative, but the 10 week average began to fall. (Non-Confirmation.) (Although the 12 week average is still positive.)

• August 25, 2010: 150 New Lows, 90 new Highs, McClellan Oscillator was negative, but again the 10 week average was falling (Non-Confirmation.) (Although the 12 week average is still positive.)

• August 31, 2010: 86 New Lows, 164 new Highs, McClellan Oscillator was negative, and the 10 week moving average was up slightly 8.86 (0.13%) but falling (non-confirmation)

• December 14, 2010: 113 New Lows, 179 New Highs, 3063 Advancers+Decliners, McClellan Oscillator was negative (-5.36), NYSE Composite Index closed at 7855.22 vs 7272.53 50 trading days prior (October 4, 2010), and the 10 week moving average was rising.

• December 15, 2010: 89 New Lows, 156 New Highs, 3044 Advancers+Decliners, McClellan Oscillator was negative (-22.59), NYSE Composite Index closed at 7798.78 vs 7434.18 50 trading days prior (October 5, 2010), and the 10 week moving average was rising. This represents a single confirmation.

References

External links

• The Hindenburg Omen Signals between 2005 and 2007
• The Past Performance of the Hindenburg Omen Stock Market Crash Signals 1985 - 2005
• McHugh's "Guest Available" article explaining the signal and documenting its performance.
• Hindenburg Omen in 2008 July 4, 2008 The Market Oracle.
• Crash Landing? Barron's July 7, 2008 comments on 2008 Hindenburg Omen
• My Two Cents - Andy Sutton - "Hurricane Hunter" - 09/25/2009
• Yahoo Finance - 08/25/2010
• Wall Street Journal - 08/23/2010 Confirmed Hindenburg Omen
• The "Vergulde Draeck" Omen (states the Hindenburg Omen is subject to manipulation)