A menacing sounding technical set-up is forecasting a potential equity market crash. This technical pattern, known as the Hindenburg Omen (named after the famous zeppellin that crashed in 1937) develops when all 5 of the following criteria are met:
- 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 or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is 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.
Yesterday, all 5 criteria were met. It’s an unusual event and Albert Edwards, the eternally bearish analyst at Societe Generale, says stocks are “tottering on the edge”:
“Equities are tottering on the edge as increasingly recessionary data becomes apparent. It would not take much to tip them over that edge. A savage equity downturn is imminent.”
According to Wikipedia a stock market crash has always been preceded by a Hindenburg Omen and stocks are generally down in the following months:
“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.”
It might sound like another silly technical indicator, but with a track record like that it might be worth noting….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.