A couple of months ago, I wrote about a sighting of the so-called “Hindenburg Omen.” A couple of readers asked some good questions about the origins and accuracy of the omen, and CNBC recently ran a story about a new sighting of the omen in the last few days, so I thought it might be worth re-visiting.
The Hindenburg Omen certainly has an ominous sound to it, being named after the famed Hindenburg blimp disaster with 36 fatalities that occurred in 1937. When CNBC reports on the Hindenburg Omen today, it is talking about the stock market, and a technical indicator that is supposed to foretell a decline in the stock market.
There are a few different variations of this indicator, but the main criteria is that we’ll see a large number of stocks hitting either 52-week highs or 52-week lows at the same time. Of all the issues that trade on the New York Stock Exchange, the NYSE, if more than 2.2 percent of the stocks are at either their high for the last calendar year, or their low for the last calendar year, that is considered to be a sign that the stock market is due for a sell-off.
There are a few other criteria that are considered and that is that the stock market overall is higher than it was 50 days ago, what’s known as the McClellan Oscillator is negative and that the number of 52-week highs cannot be more than two times the number of 52-week lows.
The omen is part of a school of stock market analysis known as technical analysis where price action from the past is used to attempt to predict future price action. While technical indicators can be used to study market action, their ability to predict future events is limited because so many different variables come into play.
Investors should be somewhat cautious about things like this that they hear on the television because sometimes the TV shows tend to offer quite a few extreme opinions. That makes the shows more exciting, if a pundit is predicting a stock market crash or a major rally, which can make for some exciting news.
It’s not very exciting to hear an analyst discuss average returns or a quiet, stable market. While technical analysis can provide some discipline to an investment strategy, it cannot predict the future.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information on his money management service can be found at his blog at www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.