Technical market analysts have been buzzing this week about an obscure indicator ominously called the “Hindenburg Omen.”
That’s the name for a trading pattern that – surprise, surprise – is said to foretell a stock market crash every bit as spectacular as the disastrous fire that destroyed the Hindenburg airship as it was preparing to land in New Jersey in 2937, killing three dozen passengers and crew.
Technical analysts hijacked the phrase to refer to the pattern that develops when stocks traded on the New York Stock Exchange are setting significant numbers of both new highs and new lows at the same time, even as the ten-week moving average is rising. Each of four factors has to kick in on the same day:
1. The number of new 52-week highs and new 52-week lows must both exceed about 2.2 percent of the stocks traded on the NYSE that day – perhaps 85 or 86 companies;
2. The NYSE index itself is higher than it was 50 trading days before;
3. The McClellan Oscillator (a market breadth indicator) has to be negative;
4. The number of new 52-week highs can’t be more than twice the number of new 52-week lows.
Got all that? Spotting the Hindenburg Omen isn’t nearly as infrequent as, say, Halley’s Comet, but that doesn’t mean that investors who believe in technical analysis – which can be a comforting discipline in uncertain market environments – aren’t rattled by its appearance not once but twice in recent weeks. The first time was in mid-April; the second, just last Friday.
So, is it time to panic? Get a grip, suggests Liz Ann Sonders, chief investment strategist at Charles Schwab. (Well, not in those words, precisely….) The theory behind the Omen may be sound – that a combination of new highs and new lows signals turmoil and confusion, which in turn can foreshadow panic and a selloff. But Sonders points out that while the Omen has appeared before every big market retreat since 1987, not every Omen automatically leads to a big market nosedive, including the one spotted in August 2010. (In that case, the selloff lasted only four trading days.)
Moreover, Sonders draws attention to the fact that many of the securities hitting new lows weren’t actually stocks, but preferred shares, closed-end fixed income securities or some other kind of NYSE-listed hybrid security. Of course, there might still be reasons to worry about the stock markets – but it may be premature to respond to the Omen by swapping your portfolio holdings for canned goods and bottled water and heading for your cabin in the hills.
