The Hindenburg Omen: Crash Signal In Play

by: Frugal Millionaire

Hindenburg omen is one of the rare stock market crash signals. The fact that it is rare makes it even more significant. A rare signal or event in the Shannon’s information theories (the backbone of the modern day digital communications) is considered to contain a higher amount of information. And this information from Hindenberg’s omen is obviously not a good news.

I have written about Hindenburg omen (H.O.) before  in 2006. Although in 2006 the H.O. signal did generate a 7% decline out of the stock market, it was by no means a “stock market crash." The current Hindenburg omen was triggered on June 6, 2008, and has been confirmed by subsequent repeated H.O. signals. The previous confirmed H.O. was in October of 2007, and stock markets definitely had a serious correction afterwards. The success rate for H.O. is only about 25%, or 1 crash in every 4 signals, and it will last for about 120 days during which it could crash. But if you could avoid those mini-crash period as a buy-and hold investor, you obviously will do so much better.

If you study the details of H.O. signal, it indicates an unhealthy stock market advance, with both new 52-week highs and new 52-week lows among different companies going on simultaneously in the stock market. The resolution for an unhealthy stock market is often a substantial decline (if it happens). It’s obvious that in the current state of stock market, the financial companies are breaking new lows, while energy stocks are breaking new highs. Isn’t that a bit scary with the crude oil advance stopped at $140? What’s going to propel the general stock market indexes higher, when crude oil is knocked out by the fear of a slowdown in global growth?

With stock market technicians that I follow, Frank Barbera, Bill Cara, Jack Chen, Bob Hoye, and John Hussman, all jumping into the bearish camp, I am fearful that a decline is just about anytime.

You’d better watch out, you’d better not cry …. Unfortunately, I am guessing that Bernanke Santa Claus will not be able to save this one.

Best luck.