The Hindenburg Omen, a technical indicator designed to identify potential stock market crashes, has started flashing just one month after its previous signal, raising concerns that a stock market downturn could be coming.
The indicator compares the percentage of stock reaching new 52-week highs and lows to a specific threshold. When the number of stocks hitting both extremes surpasses a certain level, the indicator is said to be triggered, suggesting an increased risk of a crash.
This latest signal comes amidst heightened market volatility, with investors grappling with factors like inflation and rising interest rates. While the Omen has a history of predicting major market downturns, including the 1987 crash and the 2008 financial crisis, it has also produced false alarms.
Technical analysts have argued that a single instance of the Hindenburg Omen shouldn’t be viewed in isolation. While acknowledging the indicator’s past successes, analyst Cam Hui emphasizes that its effectiveness appears to be contingent on “clusters” of occurrences.
He pointed to instances where clusters of the Omen preceded significant market downturns, such as the 2022 decline and the drop at the pandemic’s onset in 2020, as Finbold first reported.
The Hindenburg Omen is named after Germany’s Hindenburg airship that crashed back in 1937 and was created by James Miekka in 2010. The indicator, according to Investopedia, correctly predicted significant stock market crashes just 25% of the time.
As reported Paul Dietrich, the chief investment strategist at B. Riley Wealth Management, recently painted a concerning picture of the stock market, suggesting a potential decline far exceeding those seen in the early 2000s and 2008 and potentially the worst one Wall Street has seen over the past century.
Dietrich, in his latest commentary, argued that the market is currently experiencing a bubble fueled by speculation and excitement surrounding a small number of technology companies including Nvidia and Microsoft, rather than sound fundamentals like corporate earnings growth.
On top of that, analyst have recently suggested that the recent Bitcoin price drop could mean that the stock market’s benchmark index, the S&P 500, may be about to drop significantly as well, as the two assets often move in tandem as investors with greater risk appetite bet on both.
Featured image via Unsplash.
