Bulls beware. Bears are watching a technical indicator for clues of a sign of what could come.
The Hindenburg Omen, which measures the ratio between the new 52-week highs and lows, was triggered on back-to-back days last week. The technical indicator is used to predict the likelihood of a market crash. But the signal isn’t followed by many traders — because it doesn’t have a reliable track record.
Art Cashin, markets guru and director of floor operations at UBS recently described the “arcane indicator” to Cumberland Advisors after a reader asked if it was time to sell her stocks.
“Now, you have to be a little bit careful about the Hindenburg Omen because over the last 35 or 40 years, we haven’t had a market ‘crash’ without the presence of the Hindenburg Omen,” he said.
“You have to remember the other part of that, which is while there has always been a Hindenburg Omen before a crash, there has not been a crash after every Hindenburg Omen,” added Cashin.
The indicator occurred before the 2008 market crash, but “it’s very inconsistent,” Jay Woods, chief market strategist at DriveWealth told Yahoo Finance.
“We’ve had several false Hindenburg Omens over the last few years and no crash,” he added.
Even strategists predicting a market correction are weary. Bill Herrmann, managing partner at Wilshire Phoenix, points to breadth deterioration in equities and bond spreads as warning signs of trouble ahead. He refers to the Hindenburg Omen as a “ominous-sounding indicator.”
“Using any technical indicator in isolation is a mistake — and this one is no different,” Herrmann told Yahoo Finance. The Hindenburg Omen has been right roughly 25% of the time since 1987.
“Tropical storms don’t always turn into hurricanes. Nevertheless, it’s something to keep a watchful eye on because markets moves are not small when the indicator is correct,” added Herrman.
Ines is a markets reporter covering stocks from the floor of the New York Stock Exchange. Follow her on Twitter at @ines_ferre