By Mark Huffman
ConsumerAffairs.Com
August 17, 2010
Since last weekend Wall Street has been buzzing about an
ominous-sounding phenomenon known as the "Hindenburg Omen." Should you
be worried about your 401(k) or other equity investments?
The Omen is the name given to a technical trading pattern that, in the past, has signaled an impending stock market crash. The indicator appeared at the end of last week, making traders even more nervous.
The Hindenburg Omen, named for the fiery 1927 crash of the German airship, was first identified in 1995 by Jim Miekka. Specifically, it comes into play when 2.5 percent of all stocks trading on the New York Stock Exchange hit a 52 week high and at least 2.5 percent of stocks hit a 52-week low.
In Thursday's session, 2.9 percent of stocks hit 52-week highs and 2.6 percent hit 52-week lows, officially triggering the Hindenburg Omen.
The Omen is scary because the pattern appeared before every stock market meltdown since 1987. It last appeared in October 2008, the last stock market crash.
But the Omen's record of prediction is far from perfect. Since 1987 it has appeared a number of times when their was no market crash. So what are investors to make of this latest appearance?
"The Hindenburg Omen does show some deteriorating internals, which signals some major concerns," Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, told The Wall Street Journal. "But it isn't a reason to move to 100 percent in cash. We're taking a wait-and-see approach, but considering its recent history, we're considering it more than other indicators."
Jangled nerves
Investors are a perhaps a little more shaky this time since stocks have languished since late April, finding little direction. Adding to the jitters is the fact that September is usually the worst month of the year for stocks, there's been lots of talk lately about a double-dip recession, and that the news of the Omen's appearance broke on Friday the 13th. There were weekend predictions that Monday's session would be ugly.
In fact, it wasn't. The Dow Jones Industrial Average closed down less than two points in Monday's trading. A predicted wave of selling didn't materialize, some analysts say, because stocks were already beaten down considerably. Tech stocks actually had a pretty good day.
Active traders are perhaps more fearful than those who are invested in mutual funds in their retirement accounts. Traders stand to lose millions in a market crash, but it's a bit different if you are invested for the long term, especially in stocks that are producing dividends. After all, those who kept their cool and sat tight during the 2008 crash had pretty much recovered less than 12 months later.
