Hindenburg omen and US stock market crash

18 Nov 2019

We continue writing a series of posts on the possible collapse of the US stock market. We have already written about the gigantic gap that formed between the growth rate of the US stock market (especially its technological sector) and the growth rate of the country's economy. This is a classic example of the formation beginning of a price bubble, which, at the end - collapses.

Today we’ll talk about a specific indicator of the onset of the crisis, the “Hindenburg Omen”. The indicator is named after the disaster of the German airship Hindenburg, which crashed in the American city of Lakehurst in 1937.

The essence of the indicator is that it monitors the ratio of the number of securities that updated 52-week highs to the number of securities that show 52-week low. That is, part of the securities is decreasing in price, while a part is growing. The increase in the number of securities that fall in aprice above a certain mark (a fraction of the total number of shares) is a rather alarming signal (such signals are called "Hindenburg exchange"), which may indicate the stock market’s collapse.

The “Hindenburg Omen” signals not only about a change in the market phase from bullish to bearish, but about the upcoming stock market crash. Each significant sale in the US stock market over the last 30 years has been preceded by the appearance of “Hindenburg Omen”.

The classic identification criteria for the Hindenburg Omen are as follows:
1. The number of new 52-week daily highs and lows simultaneously exceeds a certain threshold (2% -3% of the total number of companies in the listing), with the number of highs is lower than the number of lows
2. The stock index is higher than it was 50 days ago (10-week yield is growing).

Recently, in the dynamics of the high-tech sector of the US stock market, “Hindenburg Omen” are increasingly found: the index shows historic highs, but less than half of the components of the index trade above their 52-week highs. Over the past 15 years, this has happened only twice: in 2007 and 2014.

That is, we have another signal in favor of the fact that the stock bubble in the US stock market may burst very soon.