The dreaded Hindenburg Omen (HO) is popping its head up in the financial news, presumably scaring many investors back into their bunkers for possibly another fall spectacle in stocks.
The first HO observation of possible trouble on the horizon was on August 12, 2010.
But first: what is the ‘Hindenburg Omen’?
The origin of the indicator traces back to its creator, James Miekka, a mathematician, who in 1995 released his doomsday barometer.
The indicator triggers positive for a heighten chance of a stock market crash when a set of technical indicators reach particular levels, all at the same time. Named after the famous German Zeppelin that crashed in a ball of fire in Lakehurst, N.J. in 1937, the indicator is said to have triggered a positive reading before all stock market crashes and major sell-offs since 1985.
“This Omen has appeared before all of the stock market crashes, or panic events, of the past 25 years,” wrote Robert McHugh, market technician at Safe Haven. “All of them. No panic sell-off occurred over the past 25 years without the presence of a Hindenburg Omen.”
According to the rules of the HO, a positive reading must be confirmed before we should consider moseying up to the panic button.
On August 20, only eight days later, we got the feared confirmation. The clock is now ticking down to the next catastrophic market event, according to the HO.
“We got a second official confirmed Hindenburg Omen observation Friday, August 20, 2010, after getting a first observation Thursday, August 12, 2010, meaning we are now on the clock watching for a stock market crash, stated McHugh. “There is a much higher than normal probability of a stock market crash starting sometime over the next four months.”
Did the HO predict the meltdown of 2008? According to McHugh, we had a confirmed HO in June of 2008. He wrote about it, then. Within the prescribed 120 days, in September, the meltdown commenced—just as it predicted.
On July 7, 2008, Barron’s picked up on the HO, ending the article with: “there’s a 25% probability of a full-blown stock-market crash in the next 120 days. Caveat emptor.”
On August 21, 2010 (the day after the confirmation of the original August 12 HO signal), Barron’s ends its article with a line that sounds like something from a fortune cookie, but acknowledges the warning of the HO: “But, like a blind prophet of Greek lore, Miekka has seen something disturbing in recent weeks. We’ll have to wait to see whether his aim is true.”
Of the 27 confirmed HO signals, eight declines in the S&P500 of more than 15% of its value ensued. There were three instances of between 10% and 14.9% declines. Four instances of between 8% and 9.9%. Six HO signals preceded pullbacks of between 5% and 7.9%. Four HO signals preceded mild drops of between 2% and 4.9%, and two signals were followed by less than 2% declines.
In all, more than three-quarters of the time the S&P500 declined at least 5% following a confirmed HO signal.
Since the first positive signal surfaced on August 12, a familiar forecaster has weighed in on the meaning of the HO.
“We always love good conspiracy theories,” said Joseph Battipaglia, chief market strategist at Stifel Nicolaus. Battipaglia warns of making too much out what could merely be a coincidence. “I for one dismiss all these things because they usually erupt most numerously during bear markets.”
In December 1999, Battipaglia thought the notion of an Internet bubble was nothing but a conspiracy theory as well. He, in fact, expected Internet companies to outperform other technology companies in the longer term.
“Some fear a burst Internet bubble, but our analysis shows that Internet companies account for only 7% of the overall Nasdaq market cap but carry expected long-term growth rates twice those of other rapidly growing segments within tech,” Battipaglia said back then.
Later in June 2009, Battipaglia said of his bad call on the tech wreck, “I just didn’t have the courage to put out the sell now signal.”
Battipaglia was the big bull in 1999 along with Abby Joseph Cohen of Goldman Sachs. Both cannot see (or have the courage to see) an imminent decline in stocks, ever, thus the perma-bull label these two wear on the Street.
Cohen has been wrong so many times, beginning with the Nasdaq meltdown, a comment from her about the HO signal could be a useful contra-indicator. But no comment is forthcoming, yet, from her.
Until Cohen comes out and pooh-poohs the HO’s warning signal as nothing but nonsense, the positive HO signals may just be another conspiracy theory as Battipaglia says.
Don’t want to take any chances? Is the bond market also warning us of trouble ahead? The following are three ETF that leverage a bet on a market decline.
Direxion Daily Financial Bear 3X Shares ETF (NYSE: FAZ), Direxion Small Cap Bear 3X Shares ETF (NYSE: TZA) and Direxion Daily Tech Bear 3x Shares ETF (NYSE: TYP).
The idea here is: financial stocks, small caps and tech usually get hit the hardest on the way down. These ETF leverage a decline by three-to-one, giving investors leverage to a group with already higher betas to the S&P500.
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