Wall Street traders this week are worrying about the so-called “Hindenburg Omen,” a technical analysis used to predict an oncoming market crash.
Named after the devastating Hindenburg explosion of 1937, the “omen” usually involves the following five criteria [as explained by Zero Hedge]:
- That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.
- That the smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues.
- That the NYSE 10 Week moving average is rising.
- That the McClellan Oscillator is negative on that same day.
- That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.
Generally speaking, you want to watch out numbers one and five, CNBC's Jeff Cox notes.
Also, for a genuine "Hindenburg Omen," the above criteria usually occur on the same day. On Monday, we came awfully close (the last time we saw something like this was around 2009).
In fact, according to Zero Hedge, "this is the most concentrated cluster of new highs, new lows, advancing/declining based confusion on record":
Granted, there have been market clusters before – but not on this scale:
Market veteran Art Cashin on Monday warned of several signs pointing to the "Hindenburg Omen."
"There have been multiple occurrences of the Hindenburg Omen in the last several weeks," the director of floor operations for UBS Financial Services said in a note to investors.
To back up his warning, Cashin cited research from Jason Goepfert, a colleague who has warned all summer about the "Omen."
From Goepfert's findings:
Sometimes a topic in the market takes hold and it's hard to shake it off. One of those is the technical "market crash" signal called the Hindenburg Omen.
It has its boosters and its detractors, and we're not going to get caught up in debating its merits. We've discussed it for 12 years, always with the same arguments.
On June 10th, we outlined the market's historical performance after suffering at least 5 signals from the Hindenburg Omen within a two-week period. Stocks were consistently weak afterward, and proved to be so again, at least for a while.
With the latest market rally, the Omens are flaring up again.There have been 5 Omens triggered out of the past 8 trading sessions (your data may vary—we're using the same sources we've always used for historical data). That's actually the closest-grouped cluster since early November 2007.
It's extremely rare to see as many Omens occurring together as we've seen over the past 50 days. The last time was prior to the bear market in 2007.
The time before that was prior to the bear market in 2000.
Now it's important to note that even if these phenomenon are present in the markets, it's not certain there will be a crash. Remember, the "Hindenburg Omen" is just a statistical analysis.
Still, recent events have Wall Street traders spooked.
"Two precedents don't make a pattern," Cashin said, "but that sure makes that 'check engine' light glow much, much brighter."
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