What it means
Market breadth looks at how many shares are taking part in a move, instead of focusing on the headline index. In a healthy rally, many shares reach new highs and few reach new lows.
The omen looks for the opposite sign of confusion, where large numbers of shares are making new 52-week highs and new 52-week lows at the same time. The signal was developed by analyst Jim Miekka and popularised later.
A commonly cited version requires that both the proportion of shares at new 52-week highs and the proportion at new lows exceed a threshold of around 2.2% of all issues, that the main index is above its level from a few months before, that a breadth indicator called the McClellan Oscillator is negative, and that new highs are not more than about twice the number of new lows. Different versions exist, which is part of the problem, because two analysts can disagree on whether a signal has appeared.
The theory is that a divided market shows that investors disagree about the direction of the economy. Some sectors are booming while others are weakening, and the index may be held up by a handful of large shares.
When the support from the wider market fades, a fall could follow. In practice, the signal has appeared many times without a crash following.
Studies and market commentary note that most signals were false alarms, although a few appeared before major falls. Traders who use it tend to tighten risk controls rather than sell everything.
A sensible way for a business reader to treat it is as one input into a risk review, alongside valuations, interest rates and company earnings. If the omen appears, a treasury team might check hedges, review exposure to equities and test how a 20% fall would affect results.
It is a prompt to prepare, not an instruction to act.
In practice
Real-world examples.
Example
A market commentator notes that a Hindenburg Omen has appeared and warns clients to review risk. Her note explains that previous signals often failed, so she recommends tightening stop-loss levels instead of selling out.
Example
A corporate treasurer sees reports of the omen during a long equity rally. She checks that her company's pension fund hedges are in place and runs a stress test showing a 20% market fall would cost the fund $12,000,000.
Example
A quantitative analyst tests the signal on 30 years of data. She finds that large falls followed only a small share of signals, and she concludes it adds little on its own. She also notes that the signal is usually treated as valid for a limited window, often a few months after it appears.
Formula
Calculation
Share of highs = new 52-week highs / total issues x 100
Share of lows = new 52-week lows / total issues x 100
Suppose 3,000 shares trade on an exchange, and on one day 90 reach new 52-week highs and 80 reach new 52-week lows.
Threshold: 2.2% x 3,000 = 66 shares.
Share of highs = 90 / 3,000 x 100 = 3.0%, which is above 2.2%.
Share of lows = 80 / 3,000 x 100 = 2.67%, which is also above 2.2%.
Highs are not more than twice the lows, because 80 x 2 = 160 and 90 is below 160. The breadth condition is met, but the other conditions, such as the trend and the McClellan Oscillator, must also be satisfied before the omen counts as confirmed.Case study
Seen in the real world.
Cobalt Advisory is a fictional firm whose investment committee saw a Hindenburg Omen flagged in the financial press. The chair asked the analyst to check the facts, and he found that the breadth conditions were met but the market had risen only modestly. He also showed the committee how often earlier signals had been followed by no meaningful fall, which put the headline in perspective.
In this illustrative meeting, the committee did not sell. Instead it reviewed the portfolio, trimmed one concentrated holding from 12% to 8% and set a plan for what to do if the index fell by 10%. The market continued upward for months, and the chair noted that the review was worthwhile even though the signal proved false.
Watch out
Common mistakes.
- Treating the omen as a reliable crash predictor, when most signals have been followed by no crash.
- Assuming every article uses the same conditions, when several versions of the signal exist.
- Selling all holdings on a warning, which can mean missing gains and paying taxes and costs.
Questions
People also ask.
Why is it called the Hindenburg Omen?
It is named after the Hindenburg airship, which was destroyed by fire in 1937, to suggest a dramatic disaster.
What does market breadth measure?
It measures how many shares are participating in a market move, instead of just the direction of the index.
Who should use it?
It may interest technical analysts, but most investors are better served by a long-term plan and regular risk reviews.
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