Stock traders have been set aflutter by the appearance of the “Hindenburg Omen”, a type of technical indicator named after the 1937 airship disaster.
The Omen measures when a large number of securities on the New York Stock Exchange are making new highs and lows – suggesting traders are having a tough time valuing an uncertain market and a fiery crash may be imminent.
The Hindenburg Omen has appeared 11 times in the past 50 days, according to Jason Goepfert at Sundial Capital Research, which specialises in chart-based “technical analysis” of the stock market. It is one of a number of ominously-named technical indicators that are believed to portend swift corrections in markets. Others include the Death Cross and the Bearish Abandoned Baby.
Mr Goepfert estimates that the S&P 500 has lost an average 3.5 per cent in the three months following at least 11 appearances of the Hindenburg Omen.
The recent sightings coincide with record highs on the S&P 500, but with the looming prospect of the Federal Reserve tapering its monetary stimulus that has lifted riskier assets like stocks. That has fed a sense of bearishness among some investors, who say it may be time to take the Omen seriously…
While the Hindenburg Omen has gained a cult following among certain stock traders, it has also been heavily criticised by others for being little more than a well-named headline-grabber of little value to investors.
“It’s just a technical signal that is far better for sound bites and articles than it is for investment purposes,” says Adam Grimes, chief investment officer at Waverly Advisors. “It does come around turning points, but it also just comes at random points in the market – a lot.”
Estimates of how many Hindenburg Omens have occurred vary wildly according to methodology. Bloomberg, which set up a “Hindenburg Index” in 2010, says it has spotted about eight instances since May.
Still, the Hindenburg Omen has been criticised for spitting out a number of “false positives” over the years. Sightings of the ominous indicator in 2010 led to a rash of stock market warnings that failed to generate an immediate market sell-off.
“If you had shorted the market on each signal, then what we find is that, frankly, like most technical signals, it’s the same as flipping a coin,” says Mr Grimes.