In the mood for arcane mathematical theorems prophesying market corrections? Say Guten Tag to the Hindenburg Omen, a technical indicator so abstruse it makes the hemline theory seem practical—except that the phenomenon, which occurred last Thursday, has preceded every major stock market crash.
The Wall Street Journal's Steven Russolillo and Tomi Kilgore report on a new panic over a coming September correction. The cause? Here are the official Hindenburg Omen criteria that were met last week:
- 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 or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues.
- That the NYSE 10 Week moving average is rising.
- That the McClellan Oscillator is negative on that same day.
- 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.
What does all that mean? The formidable L.A. libertarian pundit Marko Budgyk explains:
[Mathematician Jim] Miekka came up with the Omen in 1995 as a way to predict big market downturns, developing a formula that parses data like 52-week New Highs and Lows and the moving averages of the New York Stock Exchange. He said the HO's name was coined by a fellow market technician, Kennedy Gammage, when they found out the name "Titanic" already had been taken.
The confluence of data used by the Omen was officially tripped this week. There were 92 companies that hit new 52-week highs on Thursday, or 2.9% of all companies traded on the New York Stock Exchange. There were also 81 new lows, or 2.6% of the total. Each number must exceed 2.5% for the Omen to occur, according to Mr. Miekka.
The Omen was behind every market crash since 1987, but also has occurred many other times without an ensuing significant downturn. Market analysts said only about 25% of Omen appearances have led to stock market declines that can be considered crashes.
Even the experts, however, aren't in agreement. Robert McHugh believes that we have had one HO, which occurred on August 12th. He maintains that the HO is NOT confirmed. And, from McHugh's work, the trigger is 2.2% New Highs and New Lows, not the 2.5% that Miekka believes.
That 25 percent figure suggests the phenomenon should actually be called the "One Hindenburg and Three Goodyear Blimps Omen." As important as the capital markets are to all manner of retirement and pension issues, the performance of the NYSE at this point is so unrelated to reality on planet Earth that the question isn't so much "Will there be a crash in September?" as "Would it matter?"
Then again, when the McClellan Oscillator, the Elliott Waves and the Hindenburg Omen are all lined up the same way, that's gotta mean the King of Terror will come from the sky and bring to life the king of the Mongols.