It appears we triggered the criteria for a Hindenburg Omen with today’s market action.
I don’t put a lot of weight in the omen and Barry Ritholtz put it well back in 2010 in the WSJ, “the Hindenburg Omen is a backward-looking indicator that doesn’t consider causation. He labels it “recession porn,” contending that investors are attracted to negative commentary and conspiracy theories during skittish markets.”
From Investopedia:
According to Robert McHugh, CEO of Main Line Investors, “The omen has appeared before all of the stock market crashes, or panic events, of the past 21 years,” speaking about 1985 to 2006.
Having a signal that can generate sharp market declines is appealing to all active traders, but this signal is not as common as most traders would hope. According to McHugh, the omen only created a signal on 160 separate days, or 3.2% of the approximate 5,000 days that he studied.
Here is a chart from McClellan showing past signals going back to 1980:
Below are the criteria to trigger the Hindenburg Omen based on an article by John McClellan:
The criteria that Miekka provided are different from the ones listed in Wikipedia, likely due to refinements that Miekka made:
- Both NH and NL must exceed 2.8% of the sum of Advances plus Declines (unchanged issues ignored) on the same day.
- The NYSE Comp (NYA) must be above its value of 50 trading days ago (a conversion from a weekly MA rule to a rule befitting daily data).
- Once initiated, the signal is valid for 30 trading days, and any additional HO signals during those 30 TD should be ignored.
- The signal is activated (i.e. go short) whenever the McClellan Oscillator is negative, and deactivated whenever the McClellan Oscillator is positive (within the 30 TD window).
The criteria varies depending on which source you use, whether it be the 4 points listed above or those found at Wikipedia. I’ve put the mix of criteria in the graph below, with everything (as far as I can tell) having triggered no matter which checklist you look at.
So there you have. Take it with a grain of salt but nonetheless it’s interesting.
An Updated to this post is here
Sources:
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.
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Interesting, yes, but the machines know this, too. In fact, they probably intentionally produced it, to make one of their fantastic rip jobs higher on no real news even easier.
Salivating shorts will get taken to the cleaners again.
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I didn’t see the data yesterday, but I’m guessing it was faulty data as was the case in 2010 and 2011. Using NYSE data doesn’t work anymore because a huge number of issues on the NYSE today are fixed income products and those are what were reaching new highs. The Omen is supposed to identify periods when a large number of stocks are reaching new highs and new lows at the same time, not when a large number of stocks are reaching new lows and a large number of bonds are reaching new highs. To fix this, you would need to look at a clean sample of stock-only indexes such as the S&P 500 or Russell 1000, etc.
You’re right about the NYSE data not being as effective as it once was for the very reason you mentioned. However this is why you have to take the Hindenburg Omen with a grain of salt, the market is always changing and who is to say that 2.8% is as relevant as it once was in the 90s? This is why I’m skeptical in my post but still feel it is worth discussing. Thanks for the comment.
Andrew. In your definition you mention one of the cirteria to be met as price being higher than “50 trading days ago”, yet in your chart, you appear to use “50 days”, not trading days. Which is the correct one? Thanks. Tom
Great point Tom, the circle should be at May 15th. which $NYA is still above on July 24th. I appreciate the feedback, thanks.
Sorry it did not
You should use the original definition of the HO, not a Robert McHugh version.