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The Hindenburg Omen - zzzzz

 August 29, 2010 02:46 PM


The Hindenburg Omen (cue Jaws-like creepy music) has gotten a lot of attention lately. This dreaded technical omen is said to predict imminent stock market failure. One writer pointed out that "the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty days." Wow (cue laugh track) - a 3:1 chance of a downside move greater than 5%! The market can give up more than 5% in a week and don't need no omen to do it.

Personally, I think that people are conspiracy theorists at heart, even those of us who think we're not. Dillinger is not in Dillinger's grave, we didn't really go to the moon, etc. And I think this leaning expresses itself in a fascination, maybe a deep-seated belief in, arcane systems and patterns that explain the world's secret operating system. After all, surely God, who made this indescribably complex world, gave us the tools to decipher the universe's OS, if we can just find them. Right?

[Related -Increased Volatility Could Flip The Switch On Complacency.]

If a famed technician appeared on CNBC and did no more than opine that the market is about to crash based on his reading of certain key data points, it would draw little interest. Yawn. But take an obscure and complex formula, give it a spooky name (crash of the Hindenburg zeppelin), build its reputation through an avalanche of uncritical articles, blogs and tweets and above all - make it an OMEN… now, by God, you've got real press.

And I do mean uncritical press. Almost every writer talks in terms of the Omen's frighteningly accurate track record, like the quote above. Few have pointed out that the Omen triggers often and is overwhelmingly wrong.

[Related -A New Era For Fed Policy… And Inflation?]

In the real world, you see, the Omen gives way more false signals than real ones. More than 75% of the time, the Hindenburg has been a false omen - it triggered but there was no crash. Source: Wall St. Journal. So here is the statistic you really need: the Omen is right less than 1 time out of 4.

Yes, the Hindenburg Omen triggered before every market crash since 1987. And it also appears that most heroin addicts nursed at Mom's breast as infants. Does anyone suspect that Mother's milk leads to heroin addiction? If you want to sell all your stocks and move into Kruggerands, that is fine with me. I'll keep doing covered calls, thanks.

For those of you fascinated with these arcane things, here are the criteria necessary for the Omen to trigger, and they must all appear on the same day:

1. The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2% of total NYSE issues traded that day. (Right now, 2.2% = 69).
2. The NYSE 10 Week moving average is rising (how often could that happen?).
3. The McClellan Oscillator (not really sure what this is) is negative that day.
4. The new 52-W highs cannot be more than twice the new 52-W lows, but the number of lows CAN be double or more the highs.

It doesn't look very rigorous to me, nor even particularly relevant. I'm guessing that, with a supercomputer and years of market and economic data, you could build hundreds of indicators like this that would have triggered before every crash. But to unravel the world's secret operating system, it has to be right all the time.

Now you know.

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