Time to Fear the Hindenburg Omen?
There is disagreement over whether the New York Stock Exchange is giving signs of the much-feared Hindenburg Omen or not, but investors shouldn't place too much store in the crash indicator, Daryl Guppy, CEO of Guppytraders.com, told CNBC.com.
The omen, named after a German airship that burst into flames while making a landing in the late 1930s, was developed to predict the potential for a financial market crash. Some market watchers have been sounding the alarm and claim the omen is back.
The criteria for the omen are fairly complex, but are focused on the level of uncertainty within the NYSE. It watches for a lack of conviction among investors.
The omen is triggered when more than 2.2 percent of the NYSE Composite Index's stocks are finding new highs while another 2.2 percent or more of the issues are creating new lows. The lesser of the two numbers has to be larger than or equal to 69. The NYSE 10 also has to be rising and the McClellan Oscillator — a measure of market breadth based on advancing and declining stocks — has to be negative on that day.
If all of those criteria are met then the warning bell sounds.
"The Hindenburg Omen is index specific to the NYSE with seemingly exact requirements… This type of exactitude is often a result of statistical curve fitting and this signals caution. It's what I call a prima-donna indicator rather than a robust analysis tool," Guppy said.
There is disagreement about whether the NYSE is giving the right signal, according to Guppy. Some analysts claim it is citing their data, and others not, he said.
"I wouldn’t be reacting just to this ominous sounding omen alone," he added.
"This is not to dismiss the indicator, but like all good technical analysis, the signals from one indicator should be verified using signals from another indicator that measures the same events in a different way," Guppy said.
The NYSE is developing a head-and-shoulder reversal pattern, which is not yet fully verified, according to Guppy.
"It’s a rare double-right shoulder, but the same pattern as 1930," he said.
Guppy has previously warned CNBC that US stocks were repeating a pattern not seen since the Great Depression. The pattern, most clearly seen in the Dow Jones Industrial Average, showed a strong correlation between the market slumps of 1929 and 2008, he said. If it can’t invalidate the pattern, but could prove a bearish signal for the index, he claimed.