An Ominous Signal—the Hindenburg Omen—Is in Focus as Stocks Hit Record Highs

With the S&P 500 trading up more than 12% since the start of the year and about 25% higher over the past twelve months, the recent flashing of an ominous sell signal known as the “Hindenburg Omen” has Wall Street taking notice.

The indicator, popularized by market strategist James R. Miekka and named after the doomed German Hindenburg airship that caught fire and crashed as it attempted to land in 1937, supposedly warns of indecision as measured by market breadth, which Miekka argues is a characteristic of tops before market crashes.

However, while the Hindenburg Omen correctly predicted the 1987 stock market crash, the 2008 financial crisis, and Covid-19 pandemic sell-off, The Wall Street Journal has previously reported it correctly forecasts significant market drops just 25% of the time.

“It has a track record of calling major market tops so when the Hindenburg Omen fires it’s something that investors should take note of,“ JC O’Hara, chief technical strategist at Roth MKM told CNBC. “The issue is there are more false signals,” he added.

To help reduce these, Miekka suggested that investors should look for multiple signals in a relatively short period of time.

That theory was echoed by Humble Student of the Markets analyst Cam Hui, who posted on X after a signal last month that the indicator “tends to be effective only when it happens in clusters.”

Identifying and Applying the Hindenburg Omen Signal

To generate a Hindenburg Omen signal, four key conditions must be met:

1. The daily number of new 52-week highs and 52-week lows in a stock market index are greater than a threshold amount, typically 2.2%. 
2. The 52-week highs must not be more than two times the 52-week lows.
3. The index must be in an uptrend. Investors can quantify this by using the 10-week moving average, or the 50-day rate of change (ROC) indicator.
4. The McClellan Oscillator (MCO), a measure of the shift in market sentiment, needs to turn negative.

We’ll now apply these factors to the S&P 500 Index for Thursday, June 6, 2024. The S&P 500 finished fractionally lower after closing at a record high the previous session.

The 50-day ROC indicator quantifies an uptrend as it’s above zero, while the MCO indicator confirms negative market sentiment with a reading below zero, meaning conditions three and four have been met. 

However, condition one was not met on the day in question as 5.4% (27) of S&P 500 stocks (503) made a new 52-week high, while 1.2% (6) made a new 52-week low, according to data from Finviz.com. By extension, that also means condition two wasn’t met as the number of 52-week highs was more than two times the amount of 52-week lows.

Therefore, the Hindenburg Omen signal was not triggered. Like all indicators used in technical analysis, the signal should be used in conjunction with other indicators for added confirmation before making investment decisions.

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As of the date this article was written, the author does not own any of the above securities.