The Hindenburg Omen has triggered for the 3rd time over the past 110 trading days.
The Hindenburg Omen is designed to identify potential turning points in the stock market, raising concerns about a possible downturn.
Is this something we should be concerned about? Or not?
Here’s the chart:
(right-click and open image in new tab to zoom in)
Let's break down what the chart shows:
The blue line shows the price of the S&P 500 index.
The gray bars represent the Hindenburg Omen signals.
The criteria for the Hindenburg Omen:
1: The S&P 500 must be above its 50 day moving average.
2: New NYSE 52-week highs & new 52-week lows must both be greater than 2.8% of all advancing and declining issues.
3: The NYSE McClellan Oscillator is negative.
The Takeaway: I will begin by stating that the Hindenburg Omen should not be viewed in isolation but more as one small piece of the larger stock market puzzle. However, it is important to note that this signal tends to be more effective over shorter timeframes when we observe clusters of occurrences.
Over the past three decades, this signal has fired 118 times. One month following the signal, the average forward return for the S&P 500 is -1.4%, with 57% of the instances resulting in a negative return. Three months after the signal, the average forward return is -0.9%, with 51% of the occurrences also ending negatively.
One year later, it does get a little better but it's nothing to write home about!
While the indicator is known for predicting key downturns like the global financial crisis, it has also generated numerous false alarms.
I will be placing this information in the bearish bucket, which is still relatively empty but it is growing ever so slowly.
