Hindenburg Omen Triggered: Is Financial Doom Pending?

The Hindenburg Omen is a set of circumstances that have always preceded stock market corrections. While the presence of the Hindenburg Omen does not always guarantee that there will be a stock market crash, every single stock market crash is always preceded by the Hindenburg Omen. When more than one Omen is triggered within a thirty day period, the chances increase for a stock market correction. The Hindenburg Omen was triggered for the first time this summer on August 12th. The Omen was almost triggered on August 13th and 19th, and was triggered on August 20th. Two more unconfirmed Omens may have been triggered on August 24th and 25th. When the Hindenburg Omen is triggered, the stock market often corrects itself within 40 days.

Hindenburg Omen Indicators

Conditions for the Hindenburg Omen are pretty complicated. Four conditions have to be met. Both the number of 52-week highs and 52-week lows have to be greater than 2.8 percent of the issues on the New York Stock Exchange. The 10-week moving average has to be rising. The McClellan Oscillator, which measures the rate of money coming into or going out of the stock market, has to be negative. Finally, there cannot be more than two times the number of 52 week highs than 52 week lows. The presence of the omen is an indication that investors are uncertain about the future.

Is this Bad?

The Hindenburg Omen can appear without a selloff afterwards; however, after it appears, there is a 77% chance that there will be a 5% drop in the stock market. An omen signifies a 41% chance of a panic, and a 24% chance of a crash. Jim Miekka, who discovered the Omen, decided to get out of the stock market completely after the second Omen was triggered (for the short term, at least). He believes that there could be a 20% drop in the stock market from early August levels in the near future.

Even without the Hindenburg Omen, the economy's future would still be uncertain. Home sales are down to its lowest level since Lyndon B. Johnson was in office. Unemployment is high, and people are buying fewer durable goods. The Fed is buying treasuries. European economies are suffering. Although some people are saying that the economy has turned around, many are not in agreement.

Should You Take Action?

No matter what omens do or do not appear, it is important to understand what you are investing in, and to be comfortable with what you are doing. Historically, buy and hold has worked over long periods of time, but if you invested in August of 1929, you would have had to hold on to your stock for 25 years to get your money back (those that would have held on for 30 years would have seen their money double). Nobody can foretell the future, but if you are concerned about the economy, you may want to seek your broker's advice. The worst action that you could take would be to sell off your stocks in the middle of a panic at a bargain basement price.

Sources:

Collins, Hugh. "'Hindenburg' Omen Creator Warns of Possible 20% Stock Decline". Daily Finance, 26 October 2010.

Dow Jones Industrial Average chart from 1929 to 1960.

Durden, Tyler. "Third Hindenburg Omen Confirmation". Zero Hedge, 24 August 2010.

Glenn Beck Show. 25 August 2010.

Hindenburg Omen, Wikipedia, 27 August 2010.

McClellan Oscillator. Wikipedia, 27 August 2010.

Russolillo, Steven. "Yes Folks, Hindenburg Omen Tripped Again". Wall Street Journal, 23 August 2010.

Task, Aaron. "The Hindenburg Omen IS Scary, but so are the Fundamentals". Yahoo Finance, 25 August 2010.

"What is the Hindenburg Omen?" MyFox9.com, 26 August 2010.