What is Hindenburg Omen?

The Hindenburg Omen refers to a technical indicator created to warn of an impending stock Market disaster. It compares the percentage of new 52-week highs and lows in stock prices to a predetermined reference percentage meant to indicate the chance of a market crash increasing.

It was designed and sponsored by James R. Miekka in 2010 and named after Germany's Hindenburg airship, which fell on May 6, 1937. According to reports, only 25% of the time correctly predicted a significant stock market collapse.

Briefly Understanding the Hindenburg Omen

Given the upward bias built into most stock markets, every unusual incident usually prompts investors to flee to safety. This aspect of investor psychology is, without a doubt, the single most crucial component that contributes to market crashes.

The Hindenburg Omen searches for a statistical divergence from the premise that specific equities are establishing new 52-week highs or lows under normal conditions. It would be unusual if both happened at the exact moment.

According to the Hindenburg Omen, an occurrence like this is a sign of an oncoming danger for the stock market. The signal usually appears during an advance, when fresh highs are expected. Still, new lows are uncommon, implying that the market is uneasy and indecisive, two characteristics that commonly precede a Bear Market.

Hindenburg Omen's Situation

Volume

When the number of issues on a particular exchange reaches 52-week highs and lows and exceeds 2.8% of the total number of issues on the exchange, it is said to be in the 'early phase' of the Hindenburg Omen.

Benchmark Index

The benchmark index for the exchange must be higher than its value 50 trading days earlier (an index established to represent the overall market encompassing many securities).

McClellan Oscillator

It is a technical market breadth indicator that measures the number of advancing and declining stocks on a given exchange. The signal is 'active' when MCO is negative and vice versa once the first two conditions are met.

Other characteristics of the Hindenburg Omen include:

• The stock market must be on the rise, as seen by the 10-day Moving Average.
• 52-week highs must not exceed 52-week lows by more than twice.

Reactions to Hindenburg Omen

Traders react to the Hindenburg Omen in a variety of ways, but two common responses after an "active signal" are:

• When MCO is negative, it's a good idea to sell the market.
• When the signal is active, refrain from buying stocks or abandoning the market owing to a negative outcome.

Hindenburg Omen's Criticism

The Hindenburg Omen is claimed to come with several qualifiers, despite its acclaim and fool-proof logic. The legitimacy of the Hindenburg Omen, which some claim to have a 25% accuracy rate, is still up for debate. The indicator has several unfavourable effects, including:

1. False Signals

Even though the Hindenburg Omen has been mainly correct for the previous 35 years, the stock market may remain bullish despite an active Hindenburg Omen. The implications of multiple traders misinterpreting the omen and preparing for a crisis when one isn't coming might be significant, affecting many people's financial well-being.

2. Skewed Data

It's also been suggested that several non-cap stocks and non-stock exchange-traded funds skew the statistics by misleading the market about the true breadth and volume.

3. Outside Effect

Several exchange-traded funds (ETFs) that follow international stocks can also be found on the NYSE or NASDAQ.

Overall, the Hindenburg Omen is a valuable technical signal that has stood the test of time. However, deciphering signals in the stock market requires a certain amount of caution, so the Hindenburg Omen isn't the only one a trader can rely on.