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Wall Street is worried about signs of a new stock market crash that could threaten this year’s historic rally. Indeed, as David Keller, chief market technologist at StockCharts.com, noted, the “Hindenburg Omen” flashed last week.
The Hindenburg Omen is a technical indicator that measures the likelihood of a market crash by considering the percentage of stocks in an index that are hitting 52-week highs and lows. In the past, it accurately predicted the stock market crashes of 1987 and 2008.
That said, not everyone is convinced of the metric’s importance. Wall Street Journal, For example, he noted that the Hindenburg Omen accurately alerted traders to noteworthy corrections less than 30% of the time.
“The Hindenburg Omen has a track record of predicting major market peaks, so when it does happen, it’s something investors should be paying attention to. The problem is that we’re seeing more false signals,” said JC O’Hara, chief technical strategist at Ross MKM. “It’s like, ‘Let’s pay attention here,’ because something could happen,” O’Hara said. “But the likelihood of something serious happening is relatively low.”
Rumors of a stock market crash swirl as stock market overheats
The Hindenburg Omen comes at a strange time for the stock market: While most major indexes are hovering near all-time highs, many traders remain concerned about the uneven distribution of stock gains.
Indeed, this year’s gains have been fueled by the performance of just a handful of highly profitable companies. While the vast majority of stocks are well below their all-time highs, the big players have performed well this year. In fact, the tech-heavy stocks Nasdaq Composite Index It’s up about 15% since the start of the year. Russell 2000The small-cap index rose 1.35%, barely positive this year.
Still, O’Hara believes this year’s rally’s smaller size doesn’t make it any less valid.
“When you look at the market, I think the market is still healthy because the big names still look very healthy,” O’Hara said. “If that’s a big impact on the index, I think the index is OK. It’s just that for stock pickers, the pool of potential candidates for great buying opportunities is shrinking.”
O’Hara sees the Hindenburg as a sign of a change in the quality of the stock market, rather than a warning of a stock market crash. He’s more concerned by potential changes in discretionary spending, which accounts for about 10% of consumer spending. S&P 500.
“When I see the loss of consumers, that concerns me,” O’Hara said.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author in accordance with InvestorPlace.com’s Publishing Guidelines..
