Bullishness is running rampant on Wall Street, with the stock market charging ahead ever since hitting its lows in March 2009. Today the Dow Jones Industrial Average hit its 48th record close this year.
Will this bull continue its rampage, goring bears along the way? Or is it time for caution?
Money Morning's Chief Investment Strategist Keith Fitz-Gerald explained in August that there is one useful technical indicator that has predicted every stock market turning point since 1985.
Known as the "Hindenburg Omen," the indicator is like a warning light on a car dashboard.
It's 90% accurate in forecasting stock market corrections in excess of 5% within 30 days of giving the signal.
And right now, it's flashing its caution light, with the fifth signal appearing in recent days. A cluster of signals appeared this past summer, too.
So what exactly is the Hindenburg Omen - and how is it calculated?
The Hindenburg Omen Explained
The Hindenburg Omen was invented by mathematician Jim Miekka and was named after the famous German zeppelin airship disaster that occurred on May 6, 1937.
It focuses on market breadth on the New York Stock Exchange (NYSE), examining issues that are trading at a 52-week high and a 52-week low.
The Omen is triggered when two things happen on the same day: (1) at least 2.8% of all traded issues on the NYSE hit a new 52-week high, and (2) at least 2.8% of all traded issues on the NYSE hit a new 52-week low.
If this occurs, it suggests the market rally may not be broad-based - in effect, the stock market has a weak foundation.
Many technical analysts look at other signals to "confirm" the Hindenburg Omen.
These signals include the following:
- The number of stocks hitting 52-week highs is not more than double the 52-week lows.
- The 10-week moving average of the NYSE Composite Index is rising.
- The McClellan Oscillator is negative. (To calculate the Oscillator, subtract each day's declining stocks from advancing stocks. Then take the 19-day exponential moving average of that number and subtract the 39-day moving average of that number.)
What the Hindenburg Omen Portends
Despite the bulls brushing the Hindenburg Omen aside, some still think it's relevant.
Veteran broker for UBS and CNBC contributor Art Cashin believes the Omen is an indicator worth paying close attention to.
"It bears watching because you had clusters like this before the top of the market in 2007, and you had clusters like this as the dot-com bubble came apart," he told the Financial Times this past summer. "Since 1980, we've never had a significant market sell-off without a Hindenburg Omen. That sort of gets your attention."
As well it should, especially considering the current bull market has been going for 58 months now.
The average length of bull markets since 1953 is 43 months. Even the longest rallies have been only about 60 months.
No one knows for certain when a market pullback will occur, but the Hindenburg Omen may be flashing a warning signal right now.
Are we headed for a market correction? What can you do to prepare? Well, plenty - in fact, you can even make a killing if the markets nosedive: The Best Retirement Insurance for a Market Crash
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