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Is a Mathematical Formula Spelling Stock Market Doom?

Reality Base
By Melissa Lafsky
Jul 25, 2008 2:19 AMNov 5, 2019 1:26 AM


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The Wall Streeters are buzzing about a possible mathematical sign of economic apocalypse. Called the Hindenburg Omen, it's a formula that measures the probability of a stock market crash (defined as a 15 percent or greater decline). Hindenburg Omens have reportedly predicted every crash since 1985—though of course, the old correlation v. causation problem means that a Hindenburg Omen occurring doesn't necessarily mean a crash is on the way. The five criteria for a full-fledged omen—called a "confirmed" Hindenburg Omen—are as follows:

[T]he daily number of NYSE New 52 Week Highs and the Daily number of New 52 Week Lows must both be so high as to have the lesser of the two be greater than 2.2 percent of total NYSE issues traded that day...The traditional definition had two more filters: That the NYSE 10 Week Moving Average is also Rising, which we consider met if it is higher than the level 10 weeks earlier (condition # 2), and that the McClellan Oscillator is negative on that same day (condition # 3)... Condition # 4 requires that New 52 Week NYSE Highs cannot be more than twice New 52 Week Lows, however it is okay for New 52 Week Lows to be more than double New 52 Week Highs... The fifth condition...is that for a confirmed Hindenburg Omen...there must be more than one signal within a 36 day period, i.e., there must be a cluster of Hindenburg Omens (defined as two or more) to substantially increase the probability of a coming stock market plunge

Sure enough, June brought not only a 20-month low in the stock market but also a bona fide Hindenburg Omen. So what does it mean? According to John Nyaradi, "the bottom line here would indicate a 92 percent chance of at least a small decline on the Dow, a more than 75 percent chance of a greater than 5 percent decline, and a 65 percent chance of a panic selloff or crash." Omens or no, we'd say there's enough chance of that happening to convince even the biggest skeptic.

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