Wall Street: The First Hindenburg Omen Confirmed

The feared Hindenburg Omen was Thursday confirmed in the US stock market as the number of new highs was 136, and new lows was at 69, according to The Wall Street Journal‘s interactive Market Data Center.

“The more confirmations, the scarier it gets from a technical perspective, not to mention the conversion into a self-fulfilling prophecy.”

Zero Hedge

The first omen was spotted on August 12th:The indicator may suggest a savage equity downturn is imminent,” the famous analyst Albert Edwards at Societe Generale said then. Today,  a week later, the Hindenburg Omen has been confirmed for the first time.

Last week’s plunge in US stocks triggered a technical indicator known as the Hindenburg Omen that may signal a more severe selloff.

See: Feared Indicator Warns Of Catastrophic Stock Market Event

The market signal, named for a German zeppelin that caught fire and crashed more than seven decades ago, occurs when an unusually high number of companies in the New York Stock Exchange reach 52-week highs and lows.

The indicator last occurred in October 2008.  The signal occurred seven times in 2008 as the S&P 500 posted its biggest annual drop since the Great Depression.

The Hindenburg Omen must be confirmed with a second occurrence within 36 days to raise the alarm.

And that’s what happened today.

Self-Fulfilling Prophecy

“The more confirmations, the scarier it gets from a technical perspective, not to mention the conversion into a self-fulfilling prophecy  – like every other technical indicator,” Tyler Durden at Zero Hedge writes.

In addition; it must also occur when the NYSE McClellan Oscillator, a measure of market momentum, is negative.

Well, today’s were the McClellan oscillator at NYSE was negative at -83.6.

According to Wikipedia this is the following criteria of the Hindenburg Omen, calculated daily using Wall Street Journal figures for consistency:

  1. The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows are both greater than 2.2 percent of total NYSE issues traded that day. Based on approximately 3100 NYSE issues, the 2.2% threshold is 69.
  2. The NYSE 10 Week moving average is rising.
  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, and be repeated within a 36-day period.”

“The occurrence of all criteria on a single day is often referred to as an unconfirmed Hindenburg Omen, because the indicator has a high false alarm rate.”

An Imperfect Indicator

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

  • must be triggered 3 times in a row within a month from the 1st triggering event for said initial trigger signal to be considered to be valid
  • 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

The creators of the signal have not fully explained the selection of the threshold value of 2.2% of issues traded.

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 don’t really have predictive significance.

The Omen is at best an imperfect technical indicator that is a work in progress, in  most analysts view.

Anyway – here’s Jim Puplava talking about the mainstream media and how they spin the economic news  – and Max Keiser talks about the Hindenburg omen.
Recorded on August 14th 2010:


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Filed under International Econnomic Politics, National Economic Politics

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