Just what the stock market didn’t need: A Hindenburg sighting

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As if investors weren’t feeling edgy enough about the stock market as economic fears mount again, now there’s the ‘Hindenburg Omen’ to worry about.

Or not.

The zerohedge blog brought this generally little-discussed market indicator to light late last week, and headlines about it followed far and wide on the Web over the weekend.

The omen was created by technical analyst Jim Miekka in 1995, according to a report by Dow Jones reporter Steven Russolillo. Miekka was looking for a formula to predict stock market crashes -- hence the moniker of Hindenburg, for the German zeppelin that suddenly exploded while docking in New Jersey in 1937.

The omen requires four market conditions to be satisfied, including that a significant number of New York Stock Exchange issues hit new 52-week highs on the same day that a significant number of other NYSE shares are hitting new 52-week lows.

Why should that be a bad thing? Market technician Robert McHugh explains it well in this blog post from Sunday, but basically the idea is that a market with a meaningful number of stocks simultaneously at new highs and new lows is badly confused, and is more likely to be at risk of heading lower than higher.

All four conditions for the omen were met in Thursday’s trading session, the first time that’s happened since June 2008. Three months after that last signal, of course, was the start of the market meltdown that followed the collapse of Lehman Bros.

But to have substantial predictive value, the omen’s conditions must be met in another trading session within 36 days of the first occurrence, McHugh says. So the clock is ticking now.

As for the omen’s track record in signaling a looming market crash, that may depend on your idea of what constitutes a ‘crash.’

A true omen (meaning one whose conditions were met at least twice in a 36-day period) has been triggered fewer than 30 times since 1986, according to McHugh’s calculations. He notes that the omen has foreshadowed every major stock market decline since ‘86, including the genuine crash of October 1987 and the deep, drawn-out bear market of 2000-2002.

But most omens have been followed by market losses of less than 15% in the Dow Jones industrial average, according to a chart McHugh includes in his blog post. And although the appearance of the omen has almost always signaled a slide in the Dow, some of those declines have been blink-and-you-miss-them affairs -- a 2.1% drop in 1993, for example, and a 2.2% loss in 2005.

A final caveat: The omen isn’t always there when you really need it. It apparently was a no-show before the stock market’s slump in May and June of this year, a sell-off that slashed 16% off the Standard & Poor’s 500 index.

-- Tom Petruno