As we approach September, you will likely hear more about the Hindenburg Omen, a technical indicator that makes stock investors nervous.
The omen suggests the stock market is at risk of crashing whenever there is a large number of new 52-weeks highs and new 52-week lows on the New York Stock Exchange. It’s largely the creation of Jim Miekka, a blind mathematician who lives in Maine and who’s been getting a lot of publicity lately. It is also related to a theory developed by a fellow named Norman Fosback who, in the 1970s, created what’s known as the High Low Logic Index.
The Wall Street Journal reported on why the omen may not be true:
Emotions run high about whether the omen is rubbish or a real warning. Take a look at the comments on the Journal story to get an idea of how big the debate really is.
MarketWatch offered more details on the problems with the omen:
“For starters, there is a lot of ambiguity over how many new highs and lows must simultaneously occur in order to have bearish implications. In Fosback’s textbook, he focused on occasions when the lesser of new 52-week highs and new 52-week lows amounted to at least 5% of issues traded on the NYSE. Based on his historical studies, he found that such occasions were both rare and extremely bearish.
“The Hindenburg Omen, in contrast, requires a much lower threshold — 2.5%, in fact. In an interview earlier this week, Fosback told me that this lower cutoff is way too low to be considered bearish.
“In fact, he said, his reading of the historical data suggests to him that the current new high/new low data are solidly in the ‘neutral’ category. (Because of other indicators entirely, furthermore, Fosback is quite bullish on the stock market right now.)”
By some estimates, there have been at least two omen triggers in August. Neither sent the market reeling. Some experts are recommending Hindenburg-proof investments.
As for the man behind the theory, Miekka says he is now “out of the market” but does not expect to stay on the sidelines for long. Once there is a drop, he says, he plans to buy at lower prices again.