Not a track record to be proud of:
Graphic
Source: Moneybeat

 

 

Previously:
Hindenburg Omen? Put a Fork In It.  (March 26th, 2011)

The PermaBear to English Translation Guide (October 15th, 2010)

Category: Really, really bad calls, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

37 Responses to “Why Do People Fear the Hindenburg Omen?”

  1. Lugnut says:

    VIX is still in the teens, so who cares

  2. Randel says:

    Intuition and all its behavioral biases keep telling me some 10% drop is in the cards. But, what is more interesting is if this is cyclical bull or actually a secular one. Where is there a good indicator? All I have is intuition again with all its biases saying as long as QEs keep interest rates low, NPVs of anything get bigger; and stocks could still go higher. We have no experience to guide us for the days, when and if they come, that we see negative QE1, negative QE2, etc. And who knows the date when Ben’s helicopter is grounded.

  3. MarketStudent says:

    Norman Fosback’s High Low Logic Index has a better track record but not as sexy a name as Hindenburg Omen. Use it instead just not as a standalone indicator. Its last sell signal was in 2007, right before the “great recession.”

  4. Concerned Neighbour says:

    The broader question being, why do people believe in technical analysis?

    • ZevCapital says:

      Define technical analysis. Is connecting market trends to historic realities and illusions T.A.? Does looking at charts as a reflection of fear and greed T.A.?

    • ZevCapital says:

      Investors should “have an adequate idea of stock market history, in terms particularly of the major fluctuations. With this background he may be in a position to form some worthwhile judgment of the attractiveness or dangers. . . of the market.” – Ben Graham

      • VennData says:

        Buy, hold rebalance annually a 60/40 broad equity index and broad bond index.

        Everything else is entertainment. Expensive entertainment.

      • ZevCapital says:

        Thanks for your advice. Unfortunately, I am a member of Generation X. I entered the job market at the beginning of a secular bear market that began in 2000 and I remember receiving similar advice from 401(k) peddlers who never considered that their buy-and-hold system, which evolved during one of history’s greatest secular bull markets, might not apply under different market conditions.

        Given that we are just now getting back to the highs of 2000 and 2007, I would vigorously disagree with your Baby-Boomer overconfidence and condescension. Demographics gave the Boomers every advantage and they mistook that advantage as evidence that they were smart, when they were just lucky.

    • rd says:

      Technical analysis is coming up with a system to understand what people have been doing (instead of thinking or talking) and trying to predict what the pattern of people doing things could predict. I could see it as being of some value if you work hard and become good at it. It would be much like hitting a baseball though, where you would need lots of high quality training, practice, and results feedback to develop enough skill to make a living at it. i would expect that quite a few people would never be able to develop the metal skills and discipline to practice it well, even if they wlrked hard similary to most people couldn’t be a professional baseball player.

      Major technical levels themselves get talked about so much that they are ofteny able to create their own market reaction when they are breached, somewhat like Heisenberg’s uncertainty principle where the action of observing can change the actual result of the experiment.

  5. ZevCapital says:

    -Pretentious comment warning-

    “What’s in a name? That which we call a Hindenburg Omen
    By any other name would feel as frightening.”

    Spectacular disaster? Classic ‘Oh the humanity’ melodramatic radio coverage? Triggered fears of Prussian helmets and Kaisers? What’s not to fear besides the track record?
    Jeff Macke is trying his own version with his John Wayne Gacy Indicator
    https://twitter.com/JeffMacke/status/341531863787122688

  6. nofoulsontheplayground says:

    When I first saw HO back around late 2006, not only was it a poor tool, but the inventor claimed success even when the indexes “crashed” only 3% to 5%. I seem to recall when it was triggered, you’d get the sell on the confirmation. However, I recall the claimed drop was calculated from the trigger, not the confirmation, making the HO appear more effective than it really was.

    A better indicator here is the daily VIX chart, which is sporting an Inverse Head & Shoulders Bottom that targets around the 25 area on the VIX.

  7. czyz99 says:

    It must have something to do with the spectacular vision of a giant silvery blimp crashing to the ground in flames, while tiny figures flee for their lives. And the accompanying commentary. Sorry, but that’s all I can come up with for this mangy dog.

  8. Three answers: 1987, 2000, and 2007.

    Look carefully at the very misleading chart, and mentally turn off the log scale (or zoom in to the part starting around ’97, to expand the vertical axis on this chart-designed-to-suppress-vertical-moves)…

    This Miekka version of the Hindenburg indicator called the ’87 top, the ’90 top, the ’98 dip, the dot-com top (multiple times, practically screaming out in pain), the main dips in the ’04 to ’06 bull run, the ’07 top (again, multiple times), and also even the ’11 dip. That makes this indicator far more useful than economists and the herd of market commentators, who got none of those.

    If you think like a trader or an asset-allocator who rebalances based on valuations, rather than like “buy and forget” Warren Buffett, the Hindenburg Omen is very useful for preservation of wealth.

    (If you think like Warren Buffett, you don’t need market commentators either, but you have to be prepared to watch your real net worth in equities get shaved in half periodically, without much reassurance that you’ll be made whole until decades later.)

    Like any other technical signal, the Hindenburg is not 100% reliable. It has “false positives”. It must be used in conjunction with other evidence.

    In trading, one does not need to be right every time… but it is hard to be right often enough to come out ahead. Whereas, in “Investing”, one has to be prepared to be horribly wrong for several years… but it’s easy to come out ahead over several decades.

    However, everyone has needs that can’t wait for multiple decades (e.g. college savings funds), so we are all traders at times, whether we like it or not.

    In my personal case, the Hindenburg, this blog and others like it, and a few other signs of Clear and Present Danger saved me a ton of personal wealth in 2007-2008.

    • I am calling bullshit on your comment.

      First, this chart is not remotely misleading — it shows all of the Hindenburg calls over time.

      Second, while you dont have to be right every time, you need to be right more often than INFREQUENTLY. Hindenburg is wrong 3 out of 4 times, which means you can never rely on it.

      Lastly, there is no real causation that explains why this does or should work — so it may simply be random.

      Best of luck to you !

      • ZevCapital says:

        I love this subject and I think BR nails it with the above comment reply.

        “Lastly, there is no real causation that explains why this does or should work — so it may simply be random.”

        TA methods are bs when they are just naive curve fitting exercises. Effective edges must be based on some underlying market phenomenon. For example, bottoms form when selling has been exhausted. Tops form when the last buyer buys.

      • To each his own. Crashes start when the bottom falls out after a rally and market participants who have been pushing everything higher start to turn skittish. If you can’t see how that paints itself onto the tape in technical metrics, I hope you have an approach that works for you!

      • ZevCapital says:

        Define crash vs panics. Define bear market. Define rally.
        Since I disagree with your definition of a crash, I don’t see how the discussion can progress.
        I try to buy fear and sell greed and have developed my own noise filtering methods to do so. Keeping it simple allows me to avoid loaded and undefinable terms like “market crash”.

    • ZenInvestor says:

      I think you just got served.

    • ZenInvestor says:

      From historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77% [The Wall Street Journal 8/23/2010 article cited below states that accuracy is 25%, looking at period from 1985], and usually takes place within the next forty days. The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%. Though the Omen does not have a 100% success rate, every NYSE crash since 1985 has been preceded by a Hindenburg Omen. Of the previous 25 confirmed signals only two (8%) have failed to predict at least mild (2.0% to 4.9%) declines.

      Because of the specific and seemingly random nature of the Hindenburg Omen criteria, the phenomenon may be simply a case of overfitting. That is, by backtesting through a large data set with many different variables, correlations can be found that do not really have predictive significance. The Omen is at best an imperfect technical indicator that is a work in progress.

  9. ZenInvestor says:

    From historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 27% [The Wall Street Journal 8/23/2010 article cited below states that accuracy is 25%, looking at period from 1985], and usually takes place within the next forty days. The probability of a panic sellout was 21% and the probability of a major stock market crash was 14%. Though the Omen does not have a 100% success rate, every NYSE crash since 1985 has been preceded by a Hindenburg Omen. Of the previous 25 confirmed signals only two (8%) have failed to predict at least mild (2.0% to 4.9%) declines.

    Because of the specific and seemingly random nature of the Hindenburg Omen criteria, the phenomenon may be simply a case of overfitting. That is, by backtesting through a large data set with many different variables, correlations can be found that do not really have predictive significance. The Omen is at best an imperfect technical indicator that is a work in progress.

  10. VennData says:

    Where are they Lakshman Achuthan lovers now?

    http://www.ritholtz.com/blog/2011/07/lakshman-achuthan-leading-indicators-slowing-jobs-data/

    Another attempt to guess the future with squiggles and wriggles and tons of data.

    Fail.

    But hey, the way financial “services industry” are constructed nowadays in general – with a few wonderful exceptions – that is where the profit is.

    • I’ll f0ollow up with him

    • jpr says:

      I don’t think Lak’s methodologies take into account the full impact of helicopter Ben shenanigans. In fairness to him, Europe, Japan, and China have been dealing with recessions for the past year or so.

  11. visualvirtuoso says:

    Just throwing this out there…The newsreel crews were all sent out to Lakehurst, NJ to cover every single airship arrival to the city. Fox Movietone always sent two crews because the producer, Truman Talley was convinced that the use of hydrogen was a disaster just waiting to happen. The lensmen universally hated the assignement and complained to the editors that it was a waste of time because nothing ever happened, until it did. Not sure you can chart an omen…

  12. Frilton Miedman says:

    This “omen” is one of numerous obscure & ridiculous tricks the big boys pull out of a hat on occasions when they want to throw a scare into the retail investor to get prices down by asking media friends to pass it along to the viewing home gamers.

    The SPX has been ripping shorts to pieces all year, I’ll wager most HF managers were caught with their pants down after assuming the sequester was going to crush us.

    My take, when an anomalously large percent of stocks are on both the high and low, that means we’re in a period of rotation, it tells me it’s time to pull charts of the major sectors and use the “Dogs of Dow” logic to rebalance.

  13. CitizenWhy says:

    Fear is so stimulating, sexy, n’est-ce pas?

  14. Here’s some of the historical data on the actual Dow declines after the 1st Hindenburg signal:

    Date #Signals DJIA%Decline TimeTilBottom
    4/13/2004 5 5.4% 30 days
    6/20/2002 5 15.8% 30 days
    23.9% 112 days
    6/20/2001 2 25.5% 93 days
    3/12/2001 4 11.4% 11 days
    9/15/2000 9 12.4% 33 days
    7/26/2000 3 9.0% 83 days
    1/24/2000 6 34.2% 44 days
    6/15/1999 2 6.7% 122 days
    12/22/1998 2 0.2% 1 day
    7/21/1998 1 19.7% 41 days
    12/11/1997 11 5.8% 32 days
    6/12/1996 3 8.8% 34 days
    10/09/1995 6 1.7% 1 day
    9/19/1994 7 8.2% 65 days
    1/25/1994 14 9.6% 69 days
    11/03/1993 3 2.1% 2 days
    12/02/1991 9 3.5% 7 days
    6/27/1990 17 16.3% 91 days
    11/01/1989 36 5.0% 91 days
    10/11/1989 2 10.0% 5 days
    9/14/1987 5 38.2% 36 days
    7/14/1986 9 3.6% 21 days

    For those with liquid funds and minimal tax considerations, it might be a fairly profitable market-beating strategy to sell on a Hindenburg Omen, set a limit buy order priced to wait for a 5% decline, and then buy back in. (One would need a backup plan for the subset of cases where a 5% decline did not materialize, and one would still have to ride out the more serious declines, but it might not be a bad starting point for a market-timing strategy, particularly when combined with other measures such as Mebane Faber’s quantitative approach to tactical asset allocation, shifting in/out when the market goes above/below a moving average at the end of the month…)

    Source: http://www.safehaven.com/article/3880/the-past-performance-of-the-hindenburg-omen-stock-market-crash-signals-1985-2005

  15. peter9810 says:

    Why do people fear black cats? Friday the 13th?
    Worked with a good friend, lost on 9/11, who couldn’t function w/o his “Trading Loafers”.
    God Bless You “Bear”.

  16. Patrick Neid says:

    Putting aside the fact that fear sells newsletters, books and the like the Omen has the added spice of being difficult for the average person to construct. I would love to have the software at my fingertips to change the 2.8% qualifier, originally 2.5% discontinued to lessen signals, all the way up to 5% checking results along the way. But that said, I think H.O. has taken on the role of the grim reaper in Bergman’s Seventh Seal–always there lurking in the background with the victim never knowing when. But he is always there just before his world crashes.

    As always, selling is the easy part. Buying back in is the hard part.

  17. I wrote up a bit of commentary on the similarities and differences between the Hindenburg Omen and the Tornado Warning system, and whether we could use something like the Hindenburg Omen as a stock market warning system.

    http://blog.i4sg.com/2013/06/05/tornado-warnings-for-the-stock-market-can-we-should-we/

  18. riley says:

    Forget the Hindenburg Omen. For those who believe correlation = causation I have been doing extensive research on market crashes and while my research is not complete, the early analysis indicates that every market crash has occurred on a day the market is open. The market is open today so be careful.

  19. QuasiYoda says:

    I think most people look at this the wrong way. Without a Hindenburg Omen then the market is not going to Crash so relax. With a Hindenburg Omen then it is possible so go to further analysis use your other tools. Arch Crawford uses Mars Opposition Uranus an in much the same way. He’s not worried about a crash unless there is a Mars Uranus Opposition in effect. That will not confirm a crash scenario until the end of this year . . . so relax.

  20. [...] we asked the question Why people fear the Hindenburg Omen? despite its mixed (i.e., awful) track record in forecasting [...]

  21. DrCashFlow says:

    The key here for the HO to be a solid predictor of market risk over the next 1-3 months is that there must be a cluster of at least 4, not 2 as creator Jim Miekka and many others have stated. This current cluster is now 5. See current research by Rob Hanna of Quantifiable Edges and Jason Goepfert of Sentiment Trader.
    Following article (with chart) noted 3 recent occurrences as of June 4. That number is now 5.
    http://etfdailynews.com/2013/06/07/a-hindenburg-omen-raises-the-chances-of-a-stock-market-crash/

    • Thank you for the detailed sourced comment — That is much appreciated!

      Now if I can only find an explanation as to why HO should work, I would be happy !