By John Nyaradi
The Hindenburg Omen that is said to warn of stock market declines flashed again on Tuesday, August 13th, in an unusually heavy concentration of occurrences known as a Hindenburg Cluster. The current cluster is reported to be a new record with five occurrences over the last eight trading days.
The Hindenburg Omen has preceded steep declines in the S&P 500 (SPY) and Dow Jones Industrial Average (DIA) on multiple occasions, including the period of January-February 2000, just before the onset of the tech wreck and in the spring of 2006, just before another significant decline in the S&P 500.
Most analysts of the Hindenburg Omen say that more occurrence in a cluster amplify the chances of the indicator’s accuracy.
The current cluster is similar to the ones that occurred in late 2007 and in 2000 before the tech wreck decline.
The confirmed Hindenburg Omen clusters of July, 2007 and October, 2007 were followed by a greater than 10% decline on the S&P 500 following the July event and the big waterfall descent in the S&P 500 of more than 55% that began in October 2007.
The Hindenburg Omen cluster of October, 2000, came just in front of the 50% S&P 500 and Dow Jones Industrial Average declines that started that same month.
A Hindenburg Omen also preceded a 30+% drop in the S&P 500 in 1987.
The most recent cluster of 2013 follows a previous group of sightings that occurred on April 15th, May 29, June 4th and June 10th which adds further credence to the indicator according to students of the indicator.
The Hindenburg Omen must meet specific characteristics as defined in Wikipedia:
- 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.
- The NYSE index is greater in value than it was 50 trading days ago.
- The McClellan Oscillator is negative on the same day.
- New 52 week highs cannot be more than twice the new 52 week lows
The Hindenburg Omen points to probabilities of various degree of downside moves, usually over the next 40 days: (Wikipedia)
- 77% chance of a 5% drop
- 41% chance of a panic sell off
- 24% chance of a major stock market crash
Furthermore, every stock market crash going back to 1985 was preceded by a Hindenburg Omen.
Only 8% of Hindenburg Omens have not resulted in at least mild declines in the Dow Jones Industrial Average and S&P 500.
Bottom line: The Hindenburg Omen is wildly controversial, however, many professional analysts and traders are paying attention to this group of occurrences as it’s an unusually concentrated cluster and is occurring in conjunction with other warning signals like high margin debt and heavy retail buying of stocks. Market participants will be watching for other confirming indicators of stock market weakness over the next 40 days.
Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.