The traditional definition of a Hindenburg Omen was that the daily number of NYSE New 52 Week Highs and the Daily number of New 52 Week Lows must both be so high as to have the lesser of the two be greater than 2.2 percent of total NYSE issues traded that day.
However, this is just condition number one. The traditional definition had two more filters: That the NYSE 10 Week Moving Average is also Rising, which we consider met if it is higher than the level at any time during the previous 10 weeks (condition # 2), and that the McClellan Oscillator is negative on that same day (condition # 3). We calculate these measures each evening at
www.technicalindicatorindex.com using The Wall Street Journal figures for consistency. We consider The Wall Street Journal’s data as “official.”
Critics have taken this Hindenburg Omen definition and pointed rightly to several failed Omens. In other words, with just these three filters defining a Hindenburg Omen, there were too many false positives to render the indicator useful. We conducted research, convinced that this indicator had strong potential to predict periods of extreme stock market declines, and came up with two more filters that vastly improved the predictive value of this indicator.
Our proprietary research discovered that if we add two more filters,
then the correlation of this Hindenburg Omen condition to subsequent severe stock market declines becomes quite remarkable. We added condition # 4, which requires that New 52 Week NYSE Highs cannot be more than twice New 52 Week Lows; however it is okay for New 52 Week Lows to be more than double New 52 Week Highs. Our research found that there were two incidences where the first three conditions existed, but New Highs were more than double New Lows, and no market decline resulted.There were no instances noted where if 52 Week Highs were more than double New Lows, while the first three conditions were met, that a severe decline followed. So condition # 4 becomes a critical defining component. We also added condition # 5: The fifth condition we found important for high correlation is that for a confirmed Hindenburg Omen, in other words for it to be “official,” there must be more than one signal within a 36 day period, i.e., there must be a cluster of Hindenburg Omens (defined as two or more) to substantially increase the probability of a coming stock market plunge.
Our research noted ten instances over the past 29 years — using the first four conditions — where there was just one isolated Hindenburg Omen signal over a thirty-six day period. In nine of the ten instances, no sharp declines followed. In only one instance did a sharp subsequent sell-off occur based upon a non-cluster single Omen, but in that case it was incredibly close to having a cluster of two Omens as the previous day’s McClellan Oscillator just missed being negative by a few points. We included this instance in our data that follows.
So to recap, we have an unconfirmed Hindenburg Omen if the first four conditions are met, but the fifth is not — in other words we only have one signal within a 36 day period. Once a second or more Omen observation occurs, we then have a confirmed and official Hindenburg Omen signal with substantially higher odds that a subsequent stock market plunge is coming. Our research noted that plunges can occur as soon as the next day, or as far into the future as four months. In either case, the warning is useful.
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If we define a crash as a 15-percent decline, of the previous 31 confirmed Hindenburg Omen signals, eight (25.8 percent ) were followed by financial system threatening, life-as-we-know-it threatening stock market crashes. Three (9.8 percent) more were followed by stock market selling panics (10 percent to 14.9 percent declines).
Four more (12.9 percent) resulted in sharp declines (8 percent to 9.9 percent drops). Six (19.3 percent) were followed by meaningful declines (5 percent to 7.9 percent), six (19.3 percent) saw mild declines (2.0 percent to 4.9 percent), and four (12.9 percent) were failures, with subsequent declines of 2.0 percent or less. Put another way, there is a 25.8 percent probability that a stock market crash — the big one — will occur after we get a confirmed (more than one in a cluster) Hindenburg Omen.
There is a 35.6 percent probability that at least a panic sell-off will occur (a decline greater than 10 percent). There is a 48.5 percent probability that a sharp decline greater than 8.0 percent will occur, and there is a 67.8 percent probability that a stock market decline of at least 5 percent will occur. Only one out of roughly 8 times will this signal fail. All the biggies over the past 29 years with the exception of the July/August 2011 decline were preceded and identified by this signal (as defined with our five conditions). It was on the clock just before the stock market crash of the autumn of 2008.
