Market Beat: The Hindenburg Omen explained
One the final day of trading for the month of May, the stock market had a sharp selloff. The Dow Jones Industrial Average closed the day down more than 200 points, but was still up more than 2 percent for the month and is up more than 14 percent so far in 2013.
There are many sources in the financial media reporting that the so called “Hindenburg Omen” was seen along with Friday’s selloff. The Hindenburg Omen is certainly an ominous sounding name, but what does the term really mean and it is it really accurate as a stock market indicator?
The omen is named after the explosion and crash of the German zeppelin of the same name in 1937. Indicators like the Hindenburg Omen are part of a school of stock market analysis known as technical analysis.
Technical analysts study charts of stock market action and make forecasts based on things like past price movement, volume, moving averages, etc. The Hindenburg Omen is supposed to foretell a drop in stock markets; it is formed when multiple stocks are setting both new highs for the year and new lows at the same time.
There are several rules to show if the omen is setting up, but basically the number of stocks hitting new highs and lows are added together, and that number should be greater than 2.8 percent of the stocks that trade on the NYSE, the New York Stock Exchange. The market should also be higher than it was 50 days ago and an indicator known as the “McClellan Oscillator” should be negative.
There is no such thing as a technical indicator that forecasts market movement with 100 percent accuracy. It’s best to apply some statistical analysis to the various indicators to see what percent of the time they work.
When investors hear about things like the Hindenburg Omen in the media, they shouldn’t panic, but they should always be aware of the risks in their portfolios and understand the different ways that market risks can be managed.
Year to date, the S&P 500 is up more than 14 percent and some sort of correction would be fairly normal. The stock market usually experiences some choppiness over the summer months into the fall. Portfolio risks can be managed through diversification, the use of protective stop loss orders, by hedging and by using options to control risks.
Risk tolerance is very much an individual matter and depends on criteria like your investment time horizon, net worth, age and income.
Kenneth Roberts is a Truckee based Registered Investment Advisor. Information on his money management service can be found at his blog at http://www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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