Should Investors Be Worried About the "Hindenburg Omen"?

August 16, 2010
Terri Cullen

A reader wants to know why he's suddenly hearing so much about an impending stock-market crash -- what is the "Hindenberg Omen" and are we headed for a severe market correction?

Q: Why are people suddenly talking about another stock-market crash? Should I be concerned?A: Financial news websites and blogs were abuzz last week by the appearance Thursday of the “Hindenburg Omen” -- a technical indicator that doesn’t signal an impending market slump, it calls for a stock market crash. Technical analysts say the Omen has appeared prior to every stock market crash since 1987, though it has happened at other times without being followed by a severe market correction.

To trigger the dreaded Hindenburg Omen -- named after the 1937 Hindenburg disaster -- a number of factors need to come into play at once:

• The daily number of companies at new 52-week highs and 52-week lows on the New York must both be greater than 79. Both must also be greater than 2.2 percent of the total NYSE issues traded on that day.

• New 52-week highs cannot be more than twice the number of new 52-week lows.

• The McClellan Oscillator, which measures the breadth of the market, is negative on that same day.

• The NYSE 10-week moving average must be on the rise.

On Thursday — one day before Friday the 13th – the Omen reared its ugly head. That day, 92 companies hit new 52-week highs, or 2.9% of all companies traded on the NYSE. And 81 hit new lows, or 2.6% of all NYSE companies. The 10-week moving average was on the rise, and the market’s breadth was negative.

A one-time appearance of the Hindenburg Omen is generally a sign of an overheated market, but if the same confluence of technical factors happens again within the next few weeks, it would “confirm” the Omen, technical analysts say, and that means a steep drop in stock prices is far more likely.

Is there reason to worry? Trying to time the stock market is a sucker’s bet, but there are ways to limit your exposure to a sudden sharp downturn in the market -- or even profit from it.

Moving short-term investments into cash or cash equivalents such as Treasury bond mutual funds can help you preserve capital. American Century Target Maturities: 2020 (BTTTX), Loomis Sayles Bond Fund (LSBRX) and Fidelity Strategic Income Fund (FSICX) are three top choices, each producing an average annual return of 5 percent or more over the last five years.

Choosing investments that have a long track record of weathering market slumps well can also shield your assets from a steep market slump. Three solid performers include Auxier Focus (AUXFX), Manning & Napier World Opportunities (EXWAX) and Osterweis (OSTFX).

If you buy into the whole Hindenburg Omen theory, you may consider investing in securities that make bets that share prices will plunge. An easy way to make a short play is by investing in exchange-traded funds, which act like mutual funds but trade like stocks. ProShares Short S&P 500 (NYSE: SH), ProShares Short Dow30 (NYSE: DOG), ProShares Short QQQ (NYSE: PSQ), and ProShares UltraShort S&P 500 (NYSE: SDS) are ETFs that allow you to short the market.

Finally, investors who believe the market is headed lower have found success by investing in so-called bear market funds: Federated Prudent Bear (BEARX) fund and the Grizzly Short (GRZZX) fund are two with solid track records.

Have a financial-planning or investing question for "Ask the Expert"? Send your questions to tcullen@hcplive.com.