The Hindenburg Omen: Don’t Believe It, But Expect A Crash

by JDH on August 21, 2010

Once again we have a completely uneventful week on the markets. Two big up days, two big down days, and by the end of the week we end about where we started, although it is now two down weeks in a row for the Dow. So, to pass the time, let’s discuss the Hindenburg Omen, which is making a lot of news these days.

Tyler Durden over at was the first person to make recent reference to the Hindenburg Omen in an article he posted on August 12. Thereafter it went viral, and every Main Stream News outlet in North America picked it up and ran stories about it this week.

Named after the famous Hindenburg disaster from 1937, the Hindenburg Omen was created by Jim Miekka, and here’s how it works: if the following four indicators are tripped, a stock market decline is imminent:

  1. The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows are both greater than 2.5 percent of total NYSE issues traded that day (other sources put the number at 2.2%)
  2. The NYSE 10 Week moving average is rising.
  3. The McClellan Oscillator is negative on the same day.
  4. New 52 Week Highs cannot be more than twice the new 52 Week Lows (though new 52 Week Lows may be more than double new Highs).

It would appear that the “Omen” was triggered on August 19, and then again on August 20. Many Hindenburg Omen followers believe that the triggers must occur three times in a row from the triggering of the first event, so whether or not these is a true Omen or not will remain to be seen.

So, does the Hindenburg Omen have merit?


And No.

Yes, because every “crash” on the New York Stock Exchange since at least 1985 has been preceded by a Hindenburg Omen.

No, because, as we know, economists have predicted 25 of the last 15 recessions. In other words, it’s not that difficult to back test data to come up with criterion that work in all past cases, but that doesn’t mean it will work in the future.

My thoughts?

I’m not losing any sleep over the Hindenburg Omen. I will not be counting on my fingers 36 days from August 19, expecting to see a crash before the end of September because a series of technical indicators predicted it.

Does that mean I don’t expect a crash before the end of September, 2010?

No, as a matter of fact I would not be at all surprised to see a crash within the next few weeks. I would not be surprised at all, for a number of reasons.

First, as documented here on numerous occasions, the economy sucks. Unemployment in the U.S. is at very high levels (levels that would be much higher if millions of workers had not simply left the workforce, making the statistics look better). The consumer is not spending. Retails sales are dropping, and since the consumer is about three quarters of the economy, there cannot be a recovery without the consumer spending.

And yes, I know, the stock market is doing well, and some corporate earnings are up. That’s true, but earnings are only up because of cost cutting. If you have declines in revenue, and if you can’t cut costs forever, there will be no long term profit growth. That’s bad for the economy long term, and a big negative for the stock market.

Second, the stock market, as shown in this chart of the S&P 500, continues to make a series of lower highs. Sure, we’ve had a big rally, but until the market makes new highs, it’s not a recovery.

Third, along the same theme, as discussed previously, most recently last month in my Fibonacci Says Sell posting, we have not breached the generally accepted Fibonacci Retracement Levels. Specifically:

The S&P 500 peaked at 1,562 on October 12, 2007, and then dropped all the way to 683 on March 6, 2009. A 50% recovery would be back up to 1,123, with a full 61.8% recovery taking us back to 1,226. As we all know, the S&P 500 clawed all the way back to 1,217 on April 23, 2010, but that was it. We got within an amazing nine points of a full retracement, a breach of which would have signaled a possible resumption of the bull market.

But it didn’t get there, and it’s been downhill ever since.

So, regardless of what the Omen’s say, the market is looking lower to me, not higher. And that’s why I’m keeping a large holding in cash, with some gold and silver holdings for downside protection (although I realize that in a crash, everything will drop). I also have a few dollars in puts, just as cheap insurance.

Yes, I have been wrong all the way in the this bear market rally, but even a stopped clock is correct twice a day, and I will be proven correct eventually, perhaps sooner rather than later.

So I sit, and I wait. Don’t believe the Hindenburg Omen, because it has predicted crashes that haven’t happened, but expect a crash regardless.

Thanks for reading; see you next week.

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