Way too much attention paid to the Hindenburg Omen, that this dreaded technical pattern flashed a negative signal recently in the markets, indicating a coming crash.

Supposedly two Omen signals flashed fire engine red recently.

But market analysts say that didn’t happen.

Hindenburg Omen Explained

A 50-year old financial newsletter writer, James Miekka built the Hindenburg Omen in 1995 using a calculus essentially based on Norman G. Fosback's High Low Logic Index.

It essentially looks at stocks trading at 52-week highs and lows, and more moving parts that must miraculously line up in syzygy for the Hindenburg Omen to be set alight and then blow to smithereens over the markets.

Logic being that in a healthy market, stocks either set new yearly highs or annual lows, just not both at the same time. An unhealthy market with both new highs and lows portend a “to the lifeboats, stop the market I want to get off” moment.

As if we haven’t had enough of those already.

The Omen’s Criteria

Here are the five criteria for the Omen, named after the crash of the German zeppelin in May 1937, courtesy of my Wall Streettraders:

1. The daily number of new 52 week highs in stock trading and the daily number of new 52 week lows on the Big Board are both, emphasis on both, greater than or equal to 2.8% of the sum of the NYSE stocks that climb higher or drop in trading on a given day (84 stocks, NOTE THAT, STOCKS).

2. That the NYSE index is greater in value that it was in trading 50 trading days prior. Initially a rising 10 week moving average was used, but it was ditched for 50 to be more current.

3. That the McClellan Oscillator is negative on that same day. The Oscillator is a market breadth signal used to ascertain the growth rate of money coming in or exiting the market—it indicates an overbought or oversold condition.

4. The new 52 week highs can’t be more than double the new 52 week lows (however, it is ok for the new lows to be more than twice the new Highs). This condition is absolutely mandatory.

The Omen Was Not Triggered

Never mind that the Omen is not right 10% of the time, only a quarter of the time.

The Omen wasn’t triggered, say my Wall Streetquant sources.

When you look at the trades that supposedly hit the news highs and lows, they were not stocks.

Instead, “the vast majority of ‘stocks’ making new highs were interest sensitive closed-end funds, preferred stocks, or some other kind of fixed income product, which by my pencil are not stocks,” says Raymond James managing director Jeffrey Saut. “Therefore I’ll say the same thing I said two weeks ago, I don’t think a Hindenburg Omen has been registered; and even if it has, its track record is spotty.”

Bullish Signals?

Saut says instead that a bullish signal took place. If you really want to get technical, read this.

“What largely went unnoticed, however, was the Demark buy signal (see below) that was recorded by the SPX late last week. In addition to the Demark signal, there are some other potentially encouraging developments,” Saut says. “The McClellan Oscillator is approaching the oversold level of late June, ditto the Capitulation Index, the SPX closed at the low-end of the Bollinger Bands that have contained decline for over a year, the NFIB Hiring Plans Index just went into positive territory, and investors’ sentiment is bloody awful (read that as bullish),” Saut adds. “In fact, I have not seen retail investors so unwilling to talk about stocks since the fourth quarter of 1974!”

Saut concludes: “While in my view we have not had two Hindenburg Omen “sell signals,” we have indeed experienced two 90% downside days, without a single 90% upside day, over the past two weeks.”

He says: “I think it is a mistake to get too bearish here for the aforementioned reasons. I also think it is a mistake to get too bullish. Indeed, I believe the equity markets will remain mired in the envisioned wide-swinging trading range I spoke of following the first Dow Theory ‘sell signal’ of September 1999. In such an environment, stock selection, combined with the ability to sell mistakes quickly, should be the key to portfolio outperformance. Moreover, I agree with the insightful folks at GaveKal who suggest there are reasonable investment alternatives to the sidelines.” (EMac: Emphasis mine).

The Demark Buy Signal

Tom DeMark, founder and chief executive of Market Studies, created the “DeMark Indicators,” which enjoy an especially zealous following with institutional investors and hedge funds.

The DeMark indicators are mechanical and objective statistical indicators that attempt to anticipate both stock tops and bottoms. For nearly two decades DeMark has been a special advisor to Steven A. Cohen of SAC Capital Advisors, and he has written a number of books spelling out his indicators.

A very perfunctory snapshot of the TD Sequential Set-Up criteria:

• For a Buy signal: nine consecutive price closes that are lower than the closes four price bars earlier.

• For a Sell signal: nine consecutive price closes that are higher than the closes four price bars earlier.