Mon 23 Jun 2008
Focus du jour!
Posted by ray under Miscellaneous
Mystery of the Hindenburg Omen
June 23, 2008 – 12:00 am
The market tends to see a certain idea introduced which becomes a focus and nothing else matters.
The focus du jour for traders appears to be the Hindenburg Omen. This is a data-mined signal that is supposed to be an early warning of a market crash. The good thing about it is that it has worked relatively well in real-time trading, but the bad thing about it is that it gives a lot of false warnings.
Lately, we had two consecutive days with a Hindenburg Omen.The last two times it did so were last July and October, both excellent warning signs of more trouble to come. Historically, such signals have been more successful than not at highlighting times of heightened market risk over the next few weeks to a few months.
So what is a Hindenburg Omen? It is the alignment of several technical factors that measure the underlying condition of the stock market — specifically the NYSE —such that the probability that a stock market crash occurs is higher than normal, and the probability of a severe decline is quite high.
This Omen has appeared before all of the stock market crashes, or panic events, of the past 22 years. No panic selloff occurred over the past 22 years without the presence of a Hindenburg Omen.
Another way of looking at it is, without a confirmed Hindenburg Omen, we are pretty safe. But we have one as of October 19th, 2007. That first Hindenburg Omen signal expired October 13th. Then the markets generated a second comfirmed Hindenburg Omen cluster. The first observation occurred on October 16th, 2007. It was confirmed on October 17th. A total of observations occurred within this cluster.
How has this signal performed over the past 22 years, since 1985?
- The traditional definition of a Hindenburg Omen is that the daily number of NYSE New 52 Week Highs and the Daily number of New 52 Week Lows must both be so high as to have the lesser of the two be greater than 2.2 percent of total NYSE issues traded tha day. However, this is just condition number one.
- That the NYSE 10 Week Moving Average is also Rising (condition # 2),
- and that McClellan Oscillator is negative on that same day (condition # 3).
Critics have taken this definition and pointed rightly to several failed Omens. A research done by Robert McHugh, Ph.D showed that if we add two more filters, the correlation to subsequent severe stock market declines is remarkable.
- Condition # 4 requires that New 52 Week NYSE Highs cannot be more than twice New 52 Week Lows, however it is okay for New 52 Week Lows to be more than double New 52 Week Highs.
- The fifth condition for high correlation is for a confirmed Hindenburg Omen. For the omen to be “official,” there must be more than one signal within a 36 day period, i.e., there must be a cluster of Hindenburg Omens (defined as two or more) to substantially increase the probability of a coming stock plunge.
TO RECAP: we have an unconfirmed Hindenburg Omen if the first four conditions are met, but the fifth is not , ie when we only have one signal within a 36 day period.
Once a second or more Omen occurs, we then have a confirmed Hindenburg Omen signal with substantially higher odds that a subsequent stock market plunge is coming.
Based upon the five parameters noted above, Confirmed Hindenburg Omens are very rare. There have been only 26 confirmed Hindenburg Omen signals over the past 22 years.
All the biggies over the past 22 years were identified by this signal as defined with the five conditions. It was present and accounted for a few weeks before the stock market crash of 1987,
We also need to take into account that the Fed could intervene by pumping liquidity as it did in September 2005 to stave off a crash. The Fed did the same in April 2004 but even with liquidity, the market fell 5%.
NOW the Omen is bandied about, and the crash is yet to come, unless condition # 5 occurs.This skin-of-the teeth confirmation says a lot for multiple strong confirming signals, for without the 5 conditions, it is easy to say the Omen is more a hype!
Listen to Audio at awanginvest.com/?p=454
June 23rd, 2008 at 1:08 am
One Response to “Mystery of the Hindenburg Omen”
http://awanginvest.com/?p=454#comment-221
D-LZ129 Hindenburg (Deutsche Luftschiff Zeppelin #129) was a large German passenger carrying rigid airship which operated commercially from March 1936 until destroyed by fire in May 1937. Along with its sister-ship, D-LZ130 Graf Zeppelin II, it was the largest flying machine by volume of any kind ever built. During the first transatlantic journey of its second season of service the Hindenburg went up in flames while landing at Lakehurst Naval Air Station in Manchester Township, New Jersey. Thirty-six people died in the accident, which was widely reported by film, photography, and radio media.
The Hindenburg was named after the late Paul von Hindenburg (1847-1934), President of Germany (1925–1934).
By idkit on Jun 23, 2008 | Edit
June 28th, 2008 at 9:04 am
From banker Karl:
Jun 23 (5 days ago)
Dear Ana,
I like the piece about the Hindenburg Omen. Is anyone actively monitoring it?
It doesn’t look like it is directly evident without monitoring all components. One can only take advantage if one knows that there is actually a cluster of such events.
ANA aka IDKIT
Ag Monitor
June 28th, 2008 at 9:07 am
Karl, I suppose some organisations are doing it for a fee, eg some subscription newsletters.
So we have to wait for official statements …..we are not equipped to monitor the cluster of events.
My thinking
Recession:
http://awanginvest.com/?p=497
ANA aka IDKIT
Ag Monitor
June 30th, 2008 at 4:06 am
Sound advice from the Big Picture:
Forget the rather squishy terminology, and consider the following economic, fundamental and technical questions:
• Is the Economy expanding or contracting? Have recent data points been improving or worsening?
• Are corporate earnings getting stronger or weaker? Where are we in the earnings cycle?
• Are stock prices generally rising or falling?
• Are market advances narrow or broad? Is the volume expanding on up days, or on down days?
• Is investor Psychology greedy or fearful?
Rather than focus on terminology, investors should be considering their risk management strategies, what they are doing to preserve capital, and how they are psychologically prepared to deal with what could be an extended downturn.
That matters a whole lot more than whether something is called a bull or bear market…
MY SAY
SOUNDS LOGICAL ENOUGH!
ANA aka IDKIT
AG Moderator