The Hindenburg Omen is a market breadth indicator, named after the German zeppelin that caught fire and crashed in 1937. It utilizes data from the New Highs and New Lows list of stocks in a particular equity market to gauge market indecision.
The idea behind the Hindenburg Omen indicator is this: conventional trading wisdom says that when a stock market is trending higher over the longer term, (bull market) most stocks should be at or near their 52 week high. When the equity market is trending lower over the longer term, (bear market) most stocks should be at or near their 52 week low. The abnormality occurs when both, (i.e., a lot of new highs AND a lot of new lows) happen at the same time during an upwardly trending market.
Near the end of a bull market, an increasing number of individual stocks will start to fall (and make new lows) even while the broad market index might still be rising. This is called a divergence in market breadth and at certain levels, indicates a problem could be brewing under the surface of the bull market.
To get a warning signal, the Hindenburg Omen indicator observes the number of stocks making new 52 week highs and the number of stocks making new 52 week lows. In a strong bull market you will usually see a lot of new highs but hardly any new lows, in a bear market you will see new lows, but very little new highs. In order for the indicator to be triggered, several technical factors must be present. Here are the two most important:
- The daily number of new highs and new lows are greater than a threshold amount (typically this number is 2.2%)
- The 52 week highs can’t be more than twice the 52 week lows.
Does this indicator have a track record of success? The answer is – kind of.
When just looking at times when the Hindenburg Omen alone has been triggered, its record of successfully indicating a decline in the market is pretty spotty. But if you combine this indicator with the overall valuation level of the market (comparing the current price/earnings ratio of the market to its ten year average), then its predictive ability improves. Under those parameters it correctly pegged the declines in 1987, 2000 and 2007. However, it was also wrong in 1999 and 2013.
Most recently, this indicator was triggered in mid-September, 2018 immediately before the beginning of the 4th quarter equity market decline. It triggered again last week. As a conservative, long term investor, I don’t invest based on technical indicators. However, understanding the various technical factors that can influence investor behavior is just one of the useful tools each serious investor should have in their investing tool belt.
Randy has more than 15 years of experience managing financial assets for individuals, retirement plans and businesses. Randy joined YHB | Wealth Advisors in January of 2018 and serves as the Director of Wealth Management. Prior to entering the professional wealth management field, he enjoyed building entrepreneurial business ventures from start-up to eventual sale and providing accounting services for public and private firms.