While major stock indices in the US all managed record highs, the market breadth, indicating the overall health of the market, was just about average, which suggests a divergence between the indices and the overall market performance.
And this potential warning sign has recently been joined by another crash indicator, the Hindenburg Omen, which was triggered at the end of May after a long absence.
The Hindenburg Omen is a stock market signal that indicates major inconsistencies in a bull market. There are four criteria:
1. The 10-week (or 50-week) moving average of the benchmark index for the exchange is rising.
2. The number of stocks hitting 52-week highs cannot be more than twice that of stocks in new 52-week lows.
3. The number of stocks in a specific exchange hitting 52-week highs and lows must both exceed 2.2 percent of the number of issues in said exchange.
4. The McClellan Oscillator is negative on that same day.
The Hindenburg Omen strikes when the above criteria are matched, yet those criteria typically need to reoccur within 36 days for reconfirmation.
There is a “considerable possibility” of a notable downside after a confirmed Hindenburg Omen and the crash usually takes place within the next 40 days.
The most significant market correction after a confirmed omen occurred during the second half of 2007 when the omens meeting the above parameters were triggered six times in October and November that year.
The market plunged by as much as 60 percent after about 18 months. A market crash also took place with the omens triggered between late 2014 and mid-2015.
While the indicator has successfully predicted several meaningful pullbacks, it did miss the mark at times, namely in 2013. The accuracy of the Hindenburg Omen will again be tested this time.
The full article appeared in the Hong Kong Economic Journal on June 5
Translation by Ben Ng
[Chinese version 中文版]
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