Even with stocks at all-time highs, not all is well on Wall Street. David Keller, chief market technician at StockCharts.com, noted on Monday that the ominous “Hindenburg Omen” was triggered last week. The Hindenburg Omen takes into account the percentage of stocks on the exchange hitting 52-week highs and lows, along with other breadth indicators, to gauge the likelihood of a market crash. It successfully predicted the 1987 market crash and the 2008 financial crisis. However, the indicator’s inconsistent success rate has led many market observers to be skeptical. The Wall Street Journal previously reported that the indicator’s chances of accurately signaling a meaningful pullback were even less than 30 percent. .SPX YTD Mountain S&P 500 “It has a track record of predicting major market tops, so when the Hindenburg Omen triggers, investors should pay attention to that. The problem is that there are more false signals out there,” said J.C. O’Hara, Roth Chief Technology Strategist at MKM. “It’s more like, ‘Let’s pay attention here,’ because something could happen,” O’Hara added. “But the likelihood of a serious event is relatively low.” The bearish signal was triggered at a curious moment in the market. All three major benchmarks have surged to major milestones this month, but poor market breadth has investors worried about the health of the rebound. On Tuesday, for example, the Dow Jones Industrial Average fell while the tech-heavy Nasdaq rose on strong gains from Nvidia. Shares of the chipmaker rose more than 6%. O’Hara, however, said he was optimistic about stocks and said the breadth of the weakness did not rule out market weakness. He predicted the S&P 500 could climb to 5,700 in the coming months, with the major benchmark hitting a record high in May. The target represents a gain of about 7% from the closing price of the broader market index on Friday. “If you look at the market, I still think the market looks healthy because the biggest brands still look very healthy,” O’Hara said. “When this has a big impact on the index, I think the index is fine. It’s just that when you’re a stock picker, your potential buying opportunities are shrinking.” Given this, O’Hara expects investors will be able to Stick to passive investing in the index and the large-cap stocks that have gained the most this year. On the other hand, he expects small-cap stocks to underperform going forward. In 2024, the Russell 2000 is up just 2.5%, while the S&P 500 is up 11%. If anything, technicians view the Hindenburg Omen more as an indicator of new market leadership than a harbinger of a recession. He noted that investors have been moving toward sectors that make up a smaller portion of the S&P 500, such as utilities and real estate, rather than consumer discretionary, which makes up a larger portion of the overall index. O’Hara said he might change his stance if stocks show further weakness, such as below the S&P 500’s 50-day moving average of 5,176 or below the 100-day moving average of 5,070. He’s also cautious on consumer discretionary stocks, citing the sector’s new 52-week low, which could be a warning sign. Losses in the consumer discretionary sector, which accounts for about a tenth of the S&P 500, could mean a further 10% to 20% decline for the index. “When I see consumers churn, to me, that’s concerning,” O’Hara said.
