An obscure technical market indicator with an ominous sounding name is again capturing the attention of markets. The 'Hindenburg Omen' is a technical indicator which is supposed to foretell the collapse of the American market. The last time it appeared in August 2010 it failed. The market did not collapse. Instead the Dow Jones Industrial Average rose from 10,200 to 12,700, or about 24 percent over the next nine months.
The 'Hindenburg Omen' reveals more about the behavior of market participants than it does about the market. The indicator is named after the Hindenburg airship which burst into flames in America on May 6, 1937. Just exactly how the name is related to market conditions it describes is a bit of a mystery.
The indicator is created by monitoring the number of stocks listed on the New York Stock Exchange that make new 52-week highs relative to the number of stocks making new 52-week lows. The omen is confirmed when both numbers are greater than 2.2 percent.
(Read More: The 'Hindenburg Omen': Bear Signal Scares Market)
It's always important to distinguish between something that may be statistically significant and something that is of significance for investors. There is always a danger of confusing co-incidence with correlation. And correlations do not always have any significance in terms of prediction.
The 'Hindenburg Omen' is index specific to the NYSE with seemingly exact requirements - 2.2 percent. Exactitude creates an illusion of reliability in a world of probability. This type of exactitude is often a result of statistical curve fitting and this signals caution. This is not a robust analysis tool. Specialist indicators only perform under very specific circumstances. Robust analysis tools provide reliable results under a variety of conditions and in a variety of markets.