The Hindenburg omen is hovering over the stock market, some analysts noted, despite slight gains in the S&P and Dow Jones Industrial Average recently. Just the mention of the omen that predicts a potential financial crash scares investors.
Named after the German airship that went down in a fiery heap in New Jersey in 1937, the omen was mentioned when MarketWatch pointed out that more stocks were hitting 52-week lows than record highs.
As defined by Investopedia, the Hindenburg omen is a technical indicator monitoring the number of securities that form new 52-week highs relative to the number of securities that form new 52-week lows. The criteria for a potential crash, and for the bad things leading up to one, are deemed to be met when both numbers are greater than 2.2% of the total number of issues that trade on the NYSE (for that specific day).
The Street reported Thursday that 177 stocks hit new 12-month highs, but 226 sustained new 12-month lows. The investment website said the stat was an indication of increased uncertainty and foreshadowed corrective action. It warned investors to "stay vigilant and be ready to move as the price action continues."
The Street said such divergence has triggered Hindenburg omens for the S&P for five out of the last six sessions. Jason Goepfert, president of Sundial Capital Research, told Market Place he counted 74 omens so far in 2017, second only to 78 recorded in November 2007.
"In 2000, it only got up to 57, and in May 2015, it got up to 54," Goepfert told Market Place. "Both led to poor returns for late buyers as the indexes finally gave up and followed those lagging sectors lower."
Frank Cappelleri, a technical analyst at Instinet, noted the same Hindenburg omen pattern, Barron's said.
"This market has bucked otherwise bearish indicators and studies like this many times; the 18 month uptrend (below) continues to hold," Cappelleri said, per Barron's. "That may very well keep happening, but if the divergence between stocks making new lows and the SPX continues to widen, the index's price action could soon follow."
Goepfert told MarketWatch that while the indicators are not a concrete sign to get out of the market, and can at times be a false alarm, the fact that the "omen" is showing up in several indexes and forming so frequently is probably a good sign to brace for weakness.
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