The Big Picture:
The Hindenburg Signal: Should It Count?

It is late August and the market seems to be in a sideways funk, driven only by day-to-day news announcements and high frequency traders. This summer has been filled with talk of doom and gloom, the death cross, the double dip, etc, although the economy still seems to be treading water and growing a bit. However, no matter what the environment may be, the media always seems to be obsessed with indicators, and this past week has been no different.

There has been plenty of buzz lately surrounding the “Hindenburg Omen,” an indicator developed by a blind mathematician named James Miekka in the mid-1990’s. The indicator supposedly signals an imminent market crash, and has actually done so with every market crash since 1987. That being said, the Omen has also incorrectly signaled crashes, with no such decline following the emergence of the signal.

The indicator was triggered last week on two statistical events. First, the NYSE highs and lows both exceeded 2.5%. Stocks achieving 52-week highs were 2.9% of stocks traded on the exchange, while stocks reaching 52-week lows were 2.6%. Second, the 10-week moving average for the NYSE was rising, compared to a negative McClellan Oscillator (which shows market fluctuations).

Since the indicator was triggered, Hindenburg Omen creator James Miekka has exited the stock market, warning that the Omen is pointing to September for the next market crash.

However, it is important to recognize that the complete history of the indicator is modestly successful at best. And while indicators do identify patterns that can lead to certain market responses, it is important not to get too caught up in believing what the indicator is displaying, especially if there is a fundamental flaw in its trigger.

One of the largest institutional research firms in America recently published an article discussing the Hindenburg Omen, citing some key problems with its recent trigger. Of the stocks making new highs, only 0.4% of those stocks were common stocks. This means that many of the “stocks” making new highs on the NYSE were actually not operating companies. The indicator’s criteria states that 2.5% of NYSE stocks must make new highs and lows. However, when the indicator was created, ETFs, closed ends funds, and REIT’s were not as prevalent as they are now, and the volume of these non-operating company securities has expanded extensively. Should these securities even count?

The firm also added that none of their weekly high/low indices (including the NYSE, all markets, or their own database) have given sell signals.

We’ve talked to 3 traders today, whose combined experience tallies over 60 years, to ask them their thoughts on the Hindenburg Omen. Their responses were the same: “Never heard of it.”

While contrarian crash theories make for sensational headlines and interesting reads, indicators aren’t always the best way to explain what the market will do next, especially in these “unusually uncertain” times. The game has changed dramatically since the Hindenburg indicator was introduced, and investors have called into question whether or not the criteria for a trigger is even relevant to today’s market.

So, before you run out and stock up on canned goods for your crash shelter, it might be best to consider the big-picture environment, which appears to be neutral at the present time.