This week’s plunge in U.S. stocks triggered a technical indicator known as the Hindenburg Omen that may signal a more severe selloff, according to analysts who follow charts to predict market moves. 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.
“It’s an interesting name but what you really have as a technical background is a classic distribution phase in the market.”
Michael Riesner
The indicator last occurred in October 2008, according to UBS AG. On Friday yhe Standard & Poor’s 500 Index yesterday completed the biggest three-day decline since July 1, after an unexpected increase in unemployment claims added to evidence an economic recovery is weakening.
The benchmark gauge for U.S. stocks has dropped 3.4 percent so far this week as Federal Reserve policy makers said growth “is likely to be more modest” than they previously forecast.
The indicator may suggest “a savage equity downturn is imminent,” Albert Edwards at Societe Generale says. Edwards has told investors to favor bonds over stocks for more than a decade, according to Bloomberg.
“Equities are tottering on the edge as increasingly recessionary data becomes apparent. It would not take much to tip them over that edge.”
The Hindenburg signal was triggered yesterday as the proportion of stocks reaching new one-year highs and lows both exceeded 2.2 percent of the total listed on the NYSE, according to Michael Riesner, a technical analyst at UBS in Zurich.
The number of stocks at a 52-week high must not be more than twice the number marking lows, the technical theory also says, according to analysts.
The indicator is only valid in a rising market, as defined by the NYSE Composite Index’s rolling average value in the last 10 weeks.
It must also occur when the NYSE McClellan Oscillator, a measure of market momentum, is negative.
The Hindenburg Omen must be confirmed with a second occurrence within 36 days, according to Riesner. He says the signal occurred seven times in 2008 as the S&P 500 posted its biggest annual drop since the Great Depression.
“It’s an interesting name but what you really have as a technical background is a classic distribution phase in the market,” Riesner says. “It’s the classic tug of war between bulls and bears that you have there.”
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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:
“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
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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