Hindenburg Omen

The Hindenburg Omen is a technical analysis that attempts to predict a forthcoming stock market crash. It is named after the Hindenburg disaster, the crash of the German zeppelin in late May 1937. The Hindenburg Omen is the alignment of several technical factors that measure the underlying condition of the stock market - specifically the NYSE - such that the probability that a stock market crash occurs is higher than normal, and the probability of a severe decline is quite high. The rationale behind the indicator is that, under normal conditions, either a substantial number of stocks establish new annual highs or a large number set new lows - but not both. However, this indicator mainly tracks new lows and downside risk. A healthy market requires some degree of internal uniformity, whether the direction of that uniformity is up or down.

Criteria

The traditional definition of a Hindenburg Omen has five criteria:

*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 75. (this is not a rule but 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.

These measures are calculated each evening using Wall Street Journal figures for consistency. The occurrence of all five criteria on one day is often referred to as an unconfirmed Hindenburg Omen. A confirmed Hindenburg Omen occurs if a second (or more) Hindenburg Omen signals occur during a 36-day period from the first signal.

Conclusions

Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, 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%. However, the occurrence of a confirmed Hindenburg Omen does not necessarily mean that the stock market will go down, although every NYSE crash since 1985 has been preceded by a Hindenburg Omen.

Because of the very specific and seemingly random nature of the Hindenburg Omen criteria, it is possible that this phenomenon is simply a case of overfitting. That is, if one backtests through a large data set and tries enough different variables, eventually correlations are bound to be found that don't really have any predictive significance.

However, the fact remains that out of the previous 25 confirmed signals only 8% (two) have failed to predict at least a mild (2-4.9%) declines.

External links

* [http://www.highgrowthstock.com/IanBlog/?p=241 The Hindenburg Omen Signals between 2005 and 2007]
* [http://www.safehaven.com/showarticle.cfm?id=3880 The Past Performance of the Hindenburg Omen Stock Market Crash Signals 1985 - 2005]
* [https://www.technicalindicatorindex.com/subscribers/guest-articles/The%20Hindenburg%20Omen%20Oct%202007%20Guest%20Article%20Jan%202008.pdf McHugh's "Guest Available" article explaining the signal and documenting its performance.]
* [http://www.marketoracle.co.uk/Article5334.html Hindenburg Omen in 2008] July 4, 2008 "The Market Oracle".
* [http://online.barrons.com/article/SB121512476279728057.html?mod=googlenews_barrons Crash Landing?] "Barron's" July 7, 2008 comments on 2008 Hindenburg Omen