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Will the stock market crash like the Hindenburg?

During Thursday's huge sell-off, the stock market satisfied a condition that technical analysts call the "Hindenburg Omen" – an indicator that suggests an impending market crash.

Named after the famed German zeppelin that burned and crash over New Jersey in 1937, the Hindenburg omen occurs when an unusually high number of companies in the New York Stock Exchange reach 52-week highs and lows.

The signal was triggered yesterday as the percentage of stocks on the Big Board reaching new one-year highs and lows both exceeded 2.2 percent of the total, according to UBS.

The indicator last occurred in October 2008, around the time of the Lehman Brother collapse.

The indicator may suggest "a savage equity downturn is imminent," Albert Edwards, a London-based strategist at Societe Generale, told Bloomberg.<br /> "Equities are tottering on the edge as increasingly recessionary data becomes apparent. It would not take much to tip them over that edge."

In addition, according to the Hindenburg theory, the number of stocks at a 52-week high must not be more than twice the number marking lows. Moreover, the indicator is only valid in a rising market, as defined by the NYSE Composite Index's rolling average value in the last 10 weeks. It must also occur when the NYSE McClellan Oscillator, a measure of market momentum, is negative.

Mark Arbeter, chief technical strategist at S&P said the Hindenburg indicator "has a pretty good track record, especially when you get a cluster of warnings."
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Publication:International Business Times - US ed.
Date:Aug 13, 2010
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