The Hindenburg Omen indicates a stock market crash is coming! Time to sell?

A bifurcated stock market combined with declining investor sentiment appears to spell danger for share prices. What should Stephen Wright do?

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Hand flipping wooden cubes for change wording" Panic " to " Calm".

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The stock market has been doing well so far in 2024. But according to some investors (loosely defined) there are signs things could be about to change.

Last week, the Hindenburg Omen appeared/happened/occurred (I’m not quite sure what the correct verb is.) And that’s supposed to be a sign that a downturn is on the way.

Eh?

Here’s what the Hindenburg Omen involves:

  • The number of 52-week highs and 52-week lows in the stock market exceeds a given threshold.
  • The number of 52-week highs is equal to or less than twice the number of 52-week lows.
  • The stock market is still in an uptrend based on the 10-week moving average or the 50-day rate of change indicator.
  • The McClellan Oscillator is negative.

Right. And here’s what it means in ordinary English:

There’s a big gap between shares that have been doing well and shares that have been doing badly. And while that’s not surprising by itself, the gap is unusually large.

Investors might expect the gap to close eventually. The question is whether this involves underperforming stocks getting a boost, or the outperformers coming back down to earth.

With market sentiment turning negative, there’s a greater chance this happens by prices coming down. So some investors are expecting a stock market crash. 

Ok… now what?

Assuming this thing genuinely happened last week, what should investors do now? One answer is to sell everything, but that’s probably not a great move.

Predicting stock market crashes is notoriously hard and (unsurprisingly) the Hindenburg Omen has a mixed record. But investors might want to think carefully.

It’s undeniably true that share prices have done well over the last year or so – the FTSE 100 is up 8% and the S&P 500 is up 25%. So stocks are much more expensive than they used to be.

Given this, there’s no harm in taking a look at some investments that have done well to see whether they still look like good value. It’s something I try to do with my own portfolio.

Amazon.com

Shares in Amazon.com (NASDAQ:AMZN) are up 43% over the last 12 months and the stock is close to an all-time high at the moment. I’ve owned this one for years, so is it time to sell?

I don’t think so, but it’s definitely worth keeping a close eye on this one. With a market cap of $1.89trn, the company is going to have to generate a lot of cash to justify its current price.

My view is that it can do this. While a lot of investors are – justifiably – drawn to Amazon, I see its dominant position in the online retail space as better than the market gives it credit for.

As a result, I think the risk of the company being broken up on antitrust grounds is greater than many investors realise. But at today’s prices, I’m happy keeping hold of the stock.

But… the Hindenbug Omen!

I’m all in favour of investors assessing the stocks they own to see if there’s better value available elsewhere. But that has nothing to do with the Hindenburg Omen (or any other stock market indicator). 

The best results come from buying undervalued shares and owning them for a long time. And that’s true whether or not the stock market is about to crash.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Stephen Wright has positions in Amazon. The Motley Fool UK has recommended Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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