Wall Street is anxious over a new stock market crash indicator threatening this year’s historic rally. Indeed, the “Hindenburg Omen” flashed last week, as pointed out by David Keller, chief market technician at StockCharts.com.
The Hindenburg Omen is a technical indicator that considers the percentage of stocks in an index making 52-week highs and lows to measure the potential for a market crash. In the past, it has accurately predicted both the 1987 and 2008 stock market crashes.
That said, not everyone is convinced of the indicator’s saliency. The Wall Street Journal, for example, pointed out that the Hindenburg Omen accurately alerted traders to notable corrections less than 30% of the time.
“It has a track record of calling major market tops so when the Hindenburg Omen fires it’s something that investors should take note of. The issue is there are more false signals,” said JC O’Hara, chief technical strategist at Roth MKM. “It’s more of like, ‘Let’s pay attention here,’ because something could be happening,” O’Hara noted. “But the chances of something severe happening are relatively lower.”
Stock Market Crash Rumors Swirl Amid Top-Heavy Equities
The Hindenburg Omen comes at something of a strange point for stocks. While most major indices are trending around their highest levels ever, many traders remain concerned over the uneven distribution of stock gains.
Indeed, this year’s rally has been largely carried by the performance of just a handful of strong earners. The big names have thrived this year, even as the majority of stocks trend well below their all-time highs. Indeed, the tech-centric Nasdaq Composite is up about 15% year-to-date, while the Russell 2000, the small-cap index, is up 1.35%, barely positive for the year.
That said, O’Hara believes the narrow nature of this year’s rally doesn’t detract from its validity.
“If you’re looking at the market, I still think the market appears healthy because the largest names still appear very healthy,” O’Hara said. “When that has a big influence on the index, I think the index is fine. It’s just that when you’re a stock picker, your pool of potential candidates for great buying opportunities is shrinking.”
O’Hara views the Hindenburg as more of a sign of the stock market’s change in texture rather than a visceral stock market crash alarm. More concerning is potential changes in consumer discretionary spending, which makes up about 10% of the S&P 500.
“When I see a loss of the consumer, that, to me, it is worrisome,” O’Hara said.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
