Lead Zeppelin

Grounding the “Hindenburg”.

Contrary to public opinion, the advice of financial advisers doesn’t hinge on voodoo, tea leafs, chicken bones, or ritual sacrifices.  It runs on omens.

The “Hindenburg Omen”, a technical analysis formula developed in 1990s, with roots from the 1970s, has appeared repeatedly in the news this August.  As the name implies, the omen supposedly fortells economic doom – or more specifically  a market crash – and has already been triggered 3 to 4 times this month.  And despite a relatively short history, the Hindenburg Omen has only been wrong 8% of the time (2 out of 25 occasions) in predicting sizeable market decreases.

Or at least that’s how the story goes. 

Part of the Hindenburg’s “success rate” lies in the very defintion of a “sizable market decrease.”  The Omen has a 77% rate of accuracy at predicting at least a 5% more in the market.  Over the last few years, that could be anywhere from a bad couple of weeks to a bad day on the Dow Jones Industrial.  To put it simply, a 5% decline – or rise – doesn’t mean as much as it did when the formula was first introduced.

Another factor that benefits an increase in Hindenburg sightings is the omen’s most publicized necessary condition – that the daily number of NYSE new 52 week highs and new 52 week lows are both greater than or equal to 2.8% of the sum of NYSE issues that advanced or declined.  The 2.8% figure is much easier to reach than the 5% threshold established by the Omen’s predecessor, the High Low Logic Index.  The Index’s creator, Norman Fosback, has told financial reporters as much:

[Fosback’s] reading of the historical data suggests to him that the current new high/new low data are solidly in the “neutral” category. (Because of other indicators entirely, furthermore, Fosback is quite bullish on the stock market right now.)

In addition, there is doubt that the recent new high/new low data even reached this already too-low threshold of 2.5%. That’s because there are so many issues that now trade on the NYSE that are not operating companies.

None of this means investors should kick back and not worry.  Rising gold and treasuries certainly suggest the bull rebound that started in March of 2009 is now truly over, trading away gains while likely keeping the volatility.  Still, far too many investors may be influenced to buy into Jim Crameresque promises of “Hindenburg-proof” equities to try and escape the Hindenberg’s 25% prediction accuracy of a market collapse.

2 thoughts on “Lead Zeppelin

  1. Looks like inverstors won’t have a Whole Lotta Love for the market come September. However, I do believe that Dancing Days will be here again Out on the Tiles so long as the wise don’t get Trampled Under Foot When the Levee Breaks. Tangerine.

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