Not a track record to be proud of:

The Hindenburg Omen may be a cool sounding technical indicator, but determining its reliability is a whole other story.

Tom McClellan, whose McClellan Oscillator is among the technical indicators used to trigger a Hindenburg Omen signal, said the Omen is a great “warning,” since it successfully warned of every major declining since 1984. But as the chart shows, it’s not a great “sell” signal, since it has also flashed warnings, more often than not, especially at times when the market continued higher.

While the Omen foreshadowed significant drops in 1987 and prior to the 2008 financial crisis, it has proven to be a false alarm more often than not. Significant stock-market declines have followed the indicator just 25% of the time. For instance, the technical signal flashed in August 2010, when the Dow was trading in the low 10000s. It has since rallied more than 5000 points in less than three years.

Oppenheimer chief market technician Carter Braxton Worth believes the S&P 500 is headed for a 6-9% pullback, but not because the Hindenburg Omen says so. Worth says Hindenburg is too “mechanical” an indicator to rely on. “You become a slave to the data,” he said. “I’m not going to suspend my judgment and wait and wait until I get a reading.”

Worth has been expecting the S&P 500 to sell off to the 1535-1585 level given the “unnatural, complacent nature of the trading over the last six months.”

And McClellan is also bearish over the next several months. He expects “lots and lots of damage the rest of the summer leading to a bottom which no one will believe in September.”

If that scenario plays out, should the Hindenburg Omen be blamed for the decline? We’ll let you be the judge of that.

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