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Bad news for the stock market: The Hindenburg Omen is back

MarketWatch logo MarketWatch 8/18/2017 Sue Chang
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The dreaded Hindenburg Omen is back.

Named for the German airship that met its demise in a fiery crash 80 years ago, the appearance of this technical pattern sometimes portends a stock-market crash.

Even as the S&P 500(SPX)and the Dow Jones Industrial Average(DJIA)rose Wednesday, there were more stocks hitting 52-week lows than 52-week highs on the New York Stock Exchange — something the market hasn’t seen since July 2015, according to Jason Goepfert, president of Sundial Capital Research,

And this divergence has triggered a Hindenburg Omen on the S&P 500 for five out of the last six sessions.

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“It is a serious signal that highlights times of decoupling within an index or exchange. The S&P hasn’t suffered five signals so tightly clustered since 2007, and 2000 prior to that,” he wrote in a report.

Such clusters typically lead to poor returns in subsequent days and the last time a similar trend emerged, in November 2007, stocks fell by 1.6% in the following week and 2.3% two weeks later.

A year later, the S&P 500 was about 40% lower.

This year, the pattern has been popping up more often in all four main indexes, including the Russell 2000 (RUT) Goepfert has counted 74 omens so far in 2017, second only to 78 recorded in November 2007.

“In 2000, it only got up to 57, and in May 2015, it got up to 54. Both led to poor returns for late buyers as the indexes finally gave up and followed those lagging sectors lower,” he said. 

The Nasdaq (COMP) is also experiencing a split where less than half of the components traded above their 50-day and 200-day moving averages even as the index hovered near a record. That has only happened twice in the past 17 years, in 2007 and 2014, the strategist said.

These warnings aren’t necessarily a signal to bail out of the market immediately as they sometimes turn out to be false alarms as was the case in May 2015. Still, that they are manifesting in several indexes and forming so frequently are good reasons to brace for weakness, according to Goepfert.

As if on cue, the stock market fell sharply on Thursday as doubts mounted over President Donald Trump’s pro-growth agenda after he was forced to dismantle two business advisory councils following the defection of several corporate executives.

Sue Chang is a MarketWatch reporter in San Francisco. You can follow her on Twitter at @SueChangMW.

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