Is This Indicator Predicting a Market Crash?

Dark 'Omen' Spreads Over Wall Street

Written by Jimmy Mengel
Posted August 23, 2013

There's a dark shadow looming over Wall Street.

But it's not a bird. It's not a plane. And it sure as hell isn't Superman...

It's a flaming zeppelin spiraling downwards, about to crash into the stock market. 

The Hindenburg Omen is an ominously titled indicator that signals an impending market crash – and it has been triggered a lot recently.

You almost certainly have heard of the Hindenburg disaster, where an airship burst into flames and created a hellish display in the skies – leading to the deaths of 35 people and the complete dismantling of a once promising transportation system.

The high flying ship seemed to be sailing smoothly until hidden forces brought the ship crashing down in a blaze of horror and mayhem.

The Hindenburg Omen tracks disaster of another kind: the fiery meltdown of the stock market. And while you won't see bodies charred in a violent display, you may see retirement accounts wiped out, portfolios decimated, and investors struggling for answers...

For those who aren't familiar, the Hindenburg Omen is measured by the following criteria:

  • 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). 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).

  • 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.

  • The McClellan Oscillator is negative on the same day. (The McClellan Oscillator evaluates the rate of money entering or leaving the market to identify overbought or oversold market positions.)

  • The number of New 52 week highs cannot be more than twice the number of new 52 week lows (though new 52 week lows may be more than double new highs).

There have been five Hindenburg Omens in the past 8 trading sessions – an alarming frequency. You can see the struggle since the S&P hit all all-time high of 1,709 a couple weeks ago; it has been sputtering along ever since, failing to break 1,700 again. Even as the market was reaching that all time high, many stocks were hitting all time lows.

The last time the Omen appeared in such concentration was in 2007 – before the crash and subsequent bear market. Historically, the Omen has been rather telling. This chart from Jason Goepfert at SentimenTrader shows that following such a cluster of Hindenburg Omens, the S&P has taken a dive nine out of 11 times since 1965.

Those are some pretty good odds...

Marc "Dr. Doom" Faber – someone we can't help but think would relish in such indicators – has compared the market's behavior to that of the great crash of 1987:

[In 1987] we had a very powerful rally, but also earnings were no longer rising substantially and the market became very overbought and the final rally into August 25th occurred with a diminishing number of stock hitting 52 week highs. In other words, the new high list was contracting and we had several breaks in different stocks.

And if you look at the last two days, it’s remarkable.

We’re close to the all-time highs at 1,709 on the S&P [500] and yesterday and the day before there were 170 new 52-week lows.

That’s a very high figure.

[By the end of this year I see the market closing] lower than today.

Maybe 20%. Maybe more...

That may be the scenario we're facing right now.

As with most technical indicators, you shouldn't rely completely on any single one....but it sure serves as a warning that this year's rally may be crashing and burning. Combine that with the threat of the Fed's easy money coming to a close, and we may be staring up at a fiery crash.

Ron William from RW Market Advisory told CNBC that now is “maybe a good time to take profits within the market if indeed you see more downside risk coming up."

William also mentioned that the Hindenburg Omen has predicted all the biggest declines of the last thirty years, including the 2008 financial crash. 

And it's not just doomsday economists making these claims. The Omen is signaling at such a pace that even UBS's Art Cashin – hardly a Cassandra – appears to be concerned.

“There have been multiple occurrences of the Hindenburg Omen in the last several weeks", Cashin wrote in his weekly letter. "Two precedents don't make a pattern, but that sure makes that 'check engine' light glow much, much brighter." 

This is the single most concentrated cluster of new highs and new lows on record...and the more occurrences that cluster, the stronger the Omen becomes. 

The real Hindenburg disaster shattered confidence in giant airships. If the recent Hindenburg Omens come to pass, it may be the market confidence that finally crashes and burns.

Buckle your seatbelts...


Jimmy Mengel

follow basic @mengeled on Twitter

Jimmy is a managing editor for Outsider Club and the investment director of several personal finance advisories, The Crow's Nest, and The Adventure Capitalist For more on Jimmy, check out his editor's page.

*Follow Outsider Club on Facebook and Twitter.

Heal Your Ailing Portfolio Body