Hindenburg Omen – Strike Two and One to Go

The Hindenburg Omen is an econometrics-based model that has been successful in predicting stock market crashes. The Omen has been behind every market crash since 1987, but significant stock-market declines have followed only 25% of the time.

The Hindenburg, of course, was the German passenger airship LZ 129 Hindenburg which caught fire, and was destroyed, as it was attempting to dock at the Lakehurst Naval Air Station in New Jersey.  Thirty-five people, of the ninety-five people on board, were killed.  There was also one fatality on the ground.

The Omen’s creator is mathematician Jim Miekka, with the model’s name being suggested by the late Kennedy Gammage.  The Omen is triggered when the following occur:

• The daily number of NYSE new 52-week highs and the daily number of new 52-week lows must both be greater than 2.8% of total NYSE issues traded that day.
• 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.
• The McClellan Oscillator (a technical measure of “overbought” vs. “oversold” conditions) is negative on that same day.
• New 52-week highs cannot be more than twice the new 52-week lows. This condition is absolutely mandatory.

The traditional definition requires each condition to occur on the same day. Once the signal has occurred, it is valid for 30 days.  To eliminate false positives technical analysts have imposed the addition conditions 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 – requires double confirmation.
• Is only valid when tightly coupled triggerings occur within a two-week period of time.

These criteria have been hit twice since Aug. 12, prompting Miekka to get out of the market entirely.  Based on recent market action, many others may follow suit.

It’s not just the Omen that has investors worried.  Macroeconomic indicators suggest that the job market is not going to turn around soon.  Banks, insurance companies, and manufacturers, all, are hoarding cash.  This bodes poorly for the housing market.  As well, the Wall Street Journal reports that there is much dissention within the Fed over policy positions.  In addition, bailouts have failed to fix the problems in the U.S. financial sector.

Nobody wants to see a stock market crash, but those in power at the U.S. Treasury and at the Fed had better be clutch hitters in order to avoid a “third strike.”