Do We Need to See a Hindenburg Omen?

When we first started publishing the BAM Model’s stock market prediction of a 50% crash over the coming 2-5 months, several followers told us it would be impossible or unlikely for the market to crash without first registering a sell signal vis-a-vis the ‘Hindenburg Omen.’

Our response to them was that it is typical for the BAM Model to predict a crash prior to any Hindenburg Omen trigger.

In other words, while not predicting a Hindenburg Omen sell signal, IF we do see one we’ll likely see it trigger at lower levels after the crash is well underway.

Hindenburg Blast

I’ve posted information from Wikipedia here so that you can familiarize yourselves with this concept.

The Hindenburg Omen is a technical analysis that attempts to predict a forthcoming stock market crash. It is named after the Hindenburg disaster, the crash of the German zeppelin in late May 1937. The Hindenburg Omen is the alignment of several technical factors that measure the underlying condition of the stock market – specifically the NYSE – such that the probability that a stock market crash occurs is higher than normal, and the probability of a severe decline is quite high. The rationale behind the indicator is that, under normal conditions, either a substantial number of stocks establish new annual highs or a large number set new lows – but not both. However, this indicator mainly tracks new lows and downside risk. A healthy market requires some degree of internal uniformity, whether the direction of that uniformity is up or down.

Criteria

The traditional definition of a Hindenburg Omen has five criteria:

  • That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.
  • That the smaller of these numbers is greater than 75. (this is not a rule but a function of the 2.2% of the total issues)
  • That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.

These measures are calculated each evening using Wall Street Journal figures for consistency. The occurrence of all five criteria on one day is often referred to as an unconfirmed Hindenburg Omen. A confirmed Hindenburg Omen occurs if a second (or more) Hindenburg Omen signals occur during a 36-day period from the first signal.

Conclusions

Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty-days.

The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%. However, the occurrence of a confirmed Hindenburg Omen does not necessarily mean that the stock market will go down, although every NYSE crash since 1985 has been preceded by a Hindenburg Omen.

Because of the very specific and seemingly random nature of the Hindenburg Omen criteria, it is possible that this phenomenon is simply a case of overfitting. That is, if one backtests through a large data set and tries enough different variables, eventually correlations are bound to be found that don’t really have any predictive significance.

However, the fact remains that out of the previous 25 confirmed signals, only 8% (two) have failed to predict at least a mild (2-4.9%) decline.

The effects of the recent merger of the NYSE with Euronext may have an effect on future predictions.

All information provided by Wikipedia–  http://en.wikipedia.org/wiki/Hindenburg_Omen

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