The Hindenburg disaster, 1937. Photo Credit: U.S. Navy
Stock investors should be afraid, very afraid. Perhaps. Clusters of Hindenburg Omens are gathering. Named for the German zeppelin that crashed and burned in New Jersey in 1937, this technical stock indicator has appeared ahead of every U.S. stock market sell-off in the past quarter century. However, it has also popped up on three times as many occasions when stocks didn’t come down in flames.
A Hindenburg Omen is declared when the number of securities forming 52-week highs and the number of those forming 52-week lows is abnormally high — both numbers have to be greater than 2.2% of the total number of issues traded on the New York Stock Exchange on a day that meets a further set of technical criteria. The theory behind it, developed by Jim Miekka, a blind former high-school physics teacher turned investor, is that abnormally large numbers of new highs and lows suggests investors are deeply divided on the market’s future direction, and thus a sharp correction may be imminent.
The Hindenburg Omen has appeared 11 times in past 50 days, the Financial Times reports, quoting Jason Goepfert at Sundial Capital Research, who estimates that the S&P 500 stock index has lost an average 3.5% in the three months following at least 11 appearances of the indicator. Goepfert also estimates that stock markets “have generated positive returns three months after the emergence of clusters of Hindenburg signals about 30% of the time since 1965.” Pick your poison.
One methodological weakness in the indicator is that it counts all securities, not just stocks. Many of the new 52-week lows recently have been of closed-end funds and fixed-income securities, which have no direct bearing on the equities market, critics say. But the combination of investors jittery at the prospect of the U.S. Federal Reserve starting to wind down its stimulus program (which has helped propel stocks to their recent record levels), a technical indicator with a catchy, scary name and a cult following, and the dog days of summer on Wall Street is giving the Hindenburg Omen another run in the sun — hot air or not.
