By: Activist Post
August 14, 2010
On Thursday August 12, the US equities market triggered a confirmed technical indicator known as the “Hindenburg Omen.” This omen, as you may have guessed, suggests that a stock market crash is on the way. However, it doesn’t mean just any crash — according to Albert Edwards, a London-based strategist at Societe Generale SA, the indicator means “a savage equity downturn is imminent.”
The level of attention and significance given to this omen is truly unparalleled in the world of technical analysis, and for good reason.
• Every NYSE crash since 1985 has been preceded by a Hindenburg Omen.
• Based on historical stats, the probability of a panic sellout is 41%, while the probability of a major stock market crash is 24%.
• Out of the previous 25 confirmed signals, only 8% (two) have failed to predict at least a mild decline in equities markets.
• The probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen is 77%, and usually takes place within the next 40 days.
As a result, the Hindenburg Omen is indeed the most feared indicator for Wall Street bulls. However, when the infamous omen starts showing itself two times in two days, that’s when things can get really scary.
Thursday, August 12, was indeed a Hindenburg Omen; 100% confirmed by technical analysts worldwide. I’ve come across news stories in English, French, German, Italian, and Portuguese all proclaiming the arrival of the dreaded Omen. Suffice to say — it’s a big deal covered by every major financial outlet, and nobody in the industry doubts its significance.
However just one day before this on Wednesday, August 11, the omen almost happened as well. To trigger a full blown omen, the number of 52-week highs, and 52-week lows must both be greater than 2.2% of the total issues traded that day. There are several other criteria that must be met as well, but that is the #1 and most important factor. Simply out, it shows that the tug of war between bulls and bears is at extreme and unsustainable levels.
Looking at the NYSE August 11, 67 stocks made new 52-week highs. Had this number been 69, the Hindenburg Omen would have officially triggered that day. Just 2 stocks prevented the Omen from appearing on Wednesday. A few analysts took note, but there was not much of a reaction to this, as technical indicators either are, or aren’t confirmed. However, the very next day the Omen confirmed itself without a doubt.
What we have here is very close to seeing two Omens in back-to-back trading. If that Wednesday triggered a full blown signal, I have no doubt we’d be witnessing a media frenzy hyping up back-to-back market crashing omens. But just 2 NYSE stocks managed to prevent this event.
While I do follow the rules of technical analysis to a great degree, I find it more than unsettling that just 2 NYSE stocks can impact the broader market to this extent. Looking at the markets as a whole, these 2 stocks that prevented the Omen from triggering are borderline irrelevant. As far as I’m concerned the Aug 11 omen was close enough, that I’m staying out of equities for the next 40 days.