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Hindenburg Omen? Put a Fork In It.

Posted By Barry Ritholtz On March 26, 2011 @ 10:30 am In Markets,Really, really bad calls,Technical Analysis | Comments Disabled

Here’s the thing about unproven “technical” tools: They are dangerous to your wealth.

Recall this article ‘Hindenburg Omen [1] exactly 7 months ago on August 26 2010. If you shorted markets due to the Hindenburg Omen back on August 26 seven months ago, you have now lost about 25% of your money as of yesterday’s close — almost 30% as of the pre-quake peak in February.

And if you were festooned with QIDs, and SDS (like some recent accounts that have come into the office), over the same period those positions are down 44% or so. Ouch.

The problems with the Hindenburg omen is not that we have too small a data set (as some have suggested); rather it is a bad statistical indicator with a poor track record. In the WSJ article, I tried to emphasize both statistical and the psychological:

• The 25% track record is simply too weak statistically to pay any heed to (its worse than flipping a coin)

• The psychology that follows a major crash lends itself to what I called “Recession Porn” — an emphasis on all things bleak and negative. The Hindenburg Omen fits the profile perfectly.

Its worth rereading this article and recalling the Double Dip recession, Pre-QE2 crowd psychology.

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click for larger graph
[2]

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Source:
‘Hindenburg’ Creator Sticks to Guns [1]
STEVEN RUSSOLILLO And TOMI KILGORE
WSJ, AUGUST 26, 2010
http://online.wsj.com/article/SB10001424052748704540904575452013459211330.html


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2011/03/hindenburg-omen-put-a-fork-in-it/

URLs in this post:

[1] ‘Hindenburg Omen: http://online.wsj.com/article/SB10001424052748704540904575452013459211330

[2] Image: http://www.ritholtz.com/blog/wp-content/uploads/2011/03/Aug-26-hindenberg.png

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