Sentimentrader posts that over the past 5 days we had a cluster of Hindenburg Omens. Since I’m not going to subscribe just to read their entire article, I asked Google AI. Here’s the reply:
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Clusters of
Hindenburg omens are more reliable predictors of market downturns than single occurrences, and when they appear near an all-time market high, they signal increased potential for a correction, though they are not a guarantee. The reliability improves with multiple signals occurring within a 30-day window, but even then, significant market weakness doesn't necessarily happen immediately.
Hindenburg omens and their reliability
- Single omens are often false alarms: A single Hindenburg omen has a low accuracy rate of about 20-25% for predicting major declines.
- Clusters increase reliability: The signal becomes more reliable when two or more omens occur within a 30-day period, suggesting persistent internal weakness rather than a one-day anomaly.
- Clustering near all-time highs is particularly concerning: When these clustered signals occur at a market top, it raises the caution level, as this is when the market is most vulnerable to a significant correction.
- The time to watch is not immediate: The most significant weakness tends to appear between three weeks and six months after the omen cluster, not in the days immediately following the signal.
What the data suggests
- Historical record: The Hindenburg Omen has historically preceded major market declines, such as the dot-com bubble and the 2008 financial crisis.
- A signal of potential risk: It is best viewed as a warning sign of potential downside risk rather than a perfect predictor of a crash.
- Doesn't guarantee a crash: Not all Hindenburg omen clusters lead to a major crash, but they are more likely to signal a pullback or significant correction than a single omen is.
Limitations and important considerations
- Not a standalone tool: You should not make investment decisions based on the Hindenburg Omen alone, as it can have false positives.
- Other factors matter: The signal's effectiveness can be impacted by factors like ETFs, high-frequency trading, and changing market sentiment.
- Combine with other analysis: It is essential to use the Hindenburg Omen in conjunction with other forms of analysis, such as other technical indicators and fundamental analysis, to get a more comprehensive picture.
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I’ve been trying to understand the potential impact of ETF’s on the Hindenburg indicator (basically, multiple new lows occurring simultaneously with multiple new highs)
If you check any strongly performing ETF (the ones that are not concentrated on a narrow sector) - you’ll find that most of them own the same 15-30- 50 names, starting with Mag7. Often, they are overweighted those names. As investors buy the same names (plus the ETF’s holding them), they become increasingly overweighted the very same names. One is almost forced to own them.
Could this weaken the significance of the Hindenburg indicator?
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