Rethinking the Hindenburg Omen

The ominously named Hindenburg Omen was developed by Jim Miekka to spot major stock market tops. Unfortunately, it has also had a history of crying wolf too many times with false positives. Its inconsistency prompted one commentary to call it a warning to avoid traveling by blimp.

David Keller recently penned an article that analyzed the Hindenburg Omen in detail. He called it a breadth indicator with three specific components:

1. The stock market has to be in an established uptrend;
2. An expansion in both new 52-week highs and lows that indicate indecision; and
3. The market exhibits a price momentum break.

Keller further explained, "A valid Hindenburg Omen signal needs to have multiple signals within a 30-day window to actually register a valid bearish indication."

A chart of the Hindenburg Omen is shown below. The indicator is displayed in the lower panel and a valid signal has a value of 3. History shows that there were 11 such warnings in the last 10 years. Six saw declines (shown in pink). The market continued to advance or the Omen was too late in warning of declines in four instances (grey). One resolved in a sideways choppy market (grey/pink). While these results are marginally useful, this indicator's sell signals don't inspire a high level of confidence.

The Hindenburg Omen has recently flashed a series of sell signals. How should investors react?

The full post can be found here.