after the first Omen was triggered, Rev Shark noted the market voodoo being applied to the situation. "The logic behind this ominous-sounding indicator is this: When there are internal inconsistencies in the market that are causing a simultaneously high level of new highs and new lows, a greater risk exists that the resulting confusion and uncertainty will cause market players to exit... When the herd is confused and moving in two different directions, internally that is going to cause some problems."
In technical terms, the Hindenburg Omen is only valid in a rising market -- as measured by the NYSE composite rolling average over the past 10 weeks; the number of stocks at a 52-week high must not be more than twice those stocks at a 52-week low, and the Hindenburg set of apocalyptic conditions must occur twice in a 30-day period.
The Hindenburg Omen occurs when an unusually high number of companies in the New York Stock Exchange reach 52-week highs and lows at the same time. The proportion of NYSE stock highs and lows must both exceed 2.5% of the total listed on the exchange. While the Wikipedia entry on the Hindenburg Omen claims that the trigger is 2.2% of the NYSE total and others claim that 2.8% is the appropriate trigger, Miekka said that percentage was adjusted years ago to 2.5% to take into account the market move to decimalization. The Hindenburg Omen last occurred in October 2008, according to UBS data.
And that's not all. The Hindenburg Omen perfect storm must also include a negative measure in the NYSE McClellan Oscillator, a measure of market momentum. If it sounds like the flux capacitor of
Back to the Future
, you just don't know how to trade the charts.
The Hindenberg Omen does have a decent track record. A UBS strategist told
that the Hindenburg Omen signaled itself seven times in 2008, before the S&P posted its biggest annual drop since the Great Depression. A confirmed Hindenburg Omen has occurred prior to every major stock market crash since 1985, according to various market sources with their finger on the panic button.
Ultimately, the Hindenburg Omen was supposed to be about market uncertainty rising above an acceptable level for stability, a technical indicator for mere investor anarchy being loosed upon the markets. It did seem before the September market rally that economic conditions were about as close to anarchy as it gets, with the U.S. unemployment picture still a mess and the European debt crisis still a foremost concern.
However, a funny thing happened on the way to the imminent Hindenburg Omen stock market crash.