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Don't Mind the Hindenburg Omen

August 21, 2017

The infamous Hindenburg Omen is back once again.

While many don’t take it serious, the dreaded Omen has appeared ahead of all stock market crashes over the last 25 years. The last time it appeared, investors foolishly ignored it in December 2015 before the Dow Jones fell from 17,714 to 15,503 in weeks.

In fact, before the crash came, some noted, “We don’t think this particular instance of the Hindenburg Omen is going to turn into a big selloff.”

It even accurately called the crashes of 1987 and 2008.

So should you run and hide, sell all your assets and duck for cover? Nope.

The Omen is not an incredibly reliable indicator. Of the 42 Omens since 1985, only nine of them resulted in a market crash, a resounding success rate of 22%. Still, it’s worth paying attention to, especially with markets as overbought as they are.

Typically, the scenario is triggered by a divergence of the number stocks hitting new highs, as compared to those making new lows.

The traditional Omen is characterized by the following.

One, the daily number of NYSE new 52-week highs and the daily number of 52-week lows must both be greater than 2.2% of the total NYSE issues traded that day.

Two, the smaller of these numbers must be greater than or equal to 69 (68.772 is 2.2% of 3126). This condition is a function of the 2.2% of the total issues.

Three, the NYSE 10 Week moving average must be rising.

Four, the McClellan Oscillator must be negative on that same day.

Five, new 52 Week Highs cannot be more than twice the new 52 Week Lows.

However, it also needs confirmation. For it to be confirmed, it must appear a second time within 36 days of the first signal. While it may seem like a lot of hocus-pocus, what’s interesting is that if you look at each massive sell-off since 1985, it was preceded by the same Omen.

Granted, the Omen is not always a guarantee of a crash, but if we look back at historical data, the probability of a move greater than 5% to the downside has occurred about 77% of the time, according to The Wall Street Journal.

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