Among the more popular indicators monitored by Wall Street’s technical strategists, the “Hindenburg Omen” definitely has the coolest name.
It’s also among the more controversial. For a Hindenburg Omen to trigger, three criteria must be met, including an increase in the number of stocks simultaneously trading at new 52-week highs and new 52-week lows. Such readings are a sign of extreme dispersion beneath the surface of the index — and the fear is this may soon boil over.
Also, the New York Stock Exchange Composite Index, which tracks every stock listed on the exchange, must be in an uptrend, which makes sense: A warning issued once stocks are already sliding would come too late.
The Hindenburg Omen was developed by Jim Miekka, a mathematician and market analyst, back in 1995. It saw a surge of popularity among analysts after correctly anticipating the 2008 stock-market crash.
But according to Tom McClellan, editor of the McClellan Market Report, just because a Hindenburg Omen fired shouldn’t necessarily be interpreted as a reason to sell. The McClellan Oscillator, an indicator developed by McClellan’s parents, is the final criteria necessary to determine whether the Omen triggered or not.
“The Hindenburg Omen is a very interesting warning signal. But it is only that — a warning. It is not a guarantee of trouble, especially if the Fed is doing [quantitative easing] to paper over any problems,” he said.
The Omen most recently flashed on Monday. Prior to that, a cluster arrived in May and June, according to data shared by SentimenTrader. Dispersion within the U.S. stock market had been notably elevated at the time, as shares of semiconductor stocks rallied while software and megacap technology shares cratered.
To the degree that the Hindenburg Omen flashing should be interpreted as a credible market signal, an analysis from Dow Jones Market Data incorporating data from SentimenTrader showed that it can be useful over the near term.
Going back to 1970, average three-month returns following Hindenburg Omen signals from were negative 2%, compared with a rolling average of 2.2% over the same period, according to a Dow Jones Market Data analysis of Hindenburg Omen data supplied by SentimenTrader. Rolling one-year returns post-Omen came in at 7.4%, also below the rolling average of 9.1%.
Looking at average hit rates for the indicator over time presents a less rosy picture. Over the past 15 years, the Hindenburg Omen’s effectiveness appears to have diminished, data showed.
The S&P 500 was lower three months later just 37% of the time following a Hindenburg Omen since 1970, compared with 66% for all periods. Over the longer term, the hit rates look much less convincing: The average hit rate for the Omen going back to 1970 is 25%, roughly equivalent to the rolling average.
Hindenburg clusters
When Hindenburg Omens occur in clusters, they tend to be more effective at sniffing out near-term weakness. According to Jason Goepfert, a veteran technical analyst, when 11 or more Omens occur during a three-month period, it has in the past been a reliable harbinger of weakness to come.
His analysis showed three-month average returns were negative 3.5% following the seven instances since 1965 that met Goepfert’s criteria. This is well below the average from any random three-month period, Goepfert noted. Over a one-year period, average returns following a Hindenburg Omen cluster were 2.6%, more than 6 percentage points below the total period average.
“An individual signal is not all that informative, but when they fire consistently over weeks or even months, the false-positive rate tends to go down,” Goepfert said. Of course, that also means a smaller sample size — but pick your poison.”
The most recent Hindenburg Omen cluster of 11 or more Omens was completed on June 29. Since then, the S&P 500 has risen 4.8%, FactSet data showed.
Before that, the most recent Hindenburg cluster warning flashed on Sept. 14, 2018. Index returns were negative over the three- and six-month periods that followed, according to an analysis from NextGen Markets shared with MarketWatch by Goepfert.
Depending on who is doing the calculating, whether or not an Omen occurred on a given day can vary. According to Goepfert, there is no one official source for the stock-market breadth data used in tracking the Omen. This may account for the discrepancies between data shared by Goepfert and SentimenTrader.
To be sure, with stocks near record territory on Friday, nervous investors had plenty of other things to worry about besides obscure technicals. Rising Treasury yields and the war with Iran are just two examples.
The calendar is another. Historically, September is the weakest month for S&P 500 returns over the entire calendar year. September was rocky in 2021 and 2022, but during the past few years, the index has managed to finish the month higher, despite some hiccups here and there.
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