What's this about a Hindenburg Omen?

It’s hard to say whether those are storm clouds gathering over the stock markets, or whether that’s just the fog that’s lifting after two long years of dizzying volatility. But what about the Hindenburg Omen?

It’s been written about, blogged about and debated over the last few days. Rick Ackerman, a trader who blogs about his investment ideas, says in a post Monday that it’s not something to ignore, but perhaps not something to completely embrace. “Sometimes, though, the canny contrarian has to allow for the possibility that ‘everyone’– i.e., the multitudes who are expecting an autumn crash — will be right for a change.”

Invented in the mid-1990s by a blind mathematician named James Miekka, the Hindenburg Omen is an indicator of a market crash. Every market crash since 1987 has been signaled by the Omen, which was named by a friend of Miekka’s after the airship that exploded over New Jersey in 1937 without warning. (They were going to use “Titanic” but someone beat them to it.) That said, the Omen has also signaled declines when no such decline occurred.

The indicator was triggered by two important statistical events in the last week or so. One, NYSE highs and lows both exceeded 2.5% — stocks reaching 52-week highs were 2.9% of stocks traded at the Big Board, while stocks hitting 52-week lows were 2.6%. And a second, there was a rising 10-week moving average for the NYSE compared to a negative indicator that shows market fluctuations (the McClellan Oscillator).

The Omen is pointing to September for the next market crash, supposedly, though that’s pretty much when most markets go into a nosedive if they’re so inclined.

What if the Omen comes true? It has been a quiet, relatively boring summer of trading compared to the swoon of late 2008 followed by the see-sawing in 2009 and earlier this year. The May 6 “flash crash” during which the Dow Jones industrial average lost and then regained 500 or so points in a matter of minutes, had everyone in a panic about the flawed equity market structure in the United States, but even that wasn’t enough to force regulators into swift action.

The Securities and Exchange Commission has a number of proposals out, but hasn’t even formally banned the controversial practice of flash-orders, as it has been suggesting it would for about a year. Single stock circuit breakers are now in a pilot phase, but there have been glitches. The SEC still has to deal with all sorts of other issues, mostly to do with high frequency trading and its effects on the markets, along with all the issues it has to tackle with financial reform. Perhaps another severe correction could push regulators to act more quickly.

(from: forbes blogs)