For anyone affected by paraskevidekatriaphobia, or the fear of what might happen during a Friday that falls on the 13th day of the month, Friday, August 13, 2010, was bad enough. However, those suffering from this malady who happened to be stock analysts or investors in equities received a double psychic whammy. This is because on this day, all of the criteria for the dreaded Hindenburg Omen were met.
As the Wall Street Journal noted in its story on the day after the milestone was reached, “The (Hindenburg) Omen, named after the famous German airship in 1937 that crashed in Lakehurst, New Jersey, is a technical indicator that foreshadows not just a bear market but a stock-market crash. Its creator, a blind mathematician named Jim Miekka, said his indicator is now predicting a market meltdown in September.”
While some were worrying about black cats, broken mirrors or avoiding ladders, many stock traders and investors were urgently scanning technical price data in order to find a clue that indicates the direction of the stock market. If history is any indication of the future, traders could be in for a rough ride.
The History of the Hindenburg Omen
As a technical analyst, Miekka coined the term “Hindenburg Omen” in 1995 to denote when he expects the stock market take a dramatic downturn. His theory uses the 52-week stock levels and moving averages of the New York Stock Exchange (NYSE).
One important criterion for the onset of the Omen involves the high and low prices of the companies traded on the exchange. When each number reaches 2.5 percent, the Omen is said to occur. The Wall Street Journal reported that on August 12th, there were 92 companies that hit new highs, or 2.9 percent of all companies traded on the NYSE. During this week, there were also 81 companies that reached new lows, or 2.6 percent of the total.
Other criteria for the Omen include a rising 10-week moving average for NYSE and a negative McClellan Oscillator which is a technical indicator that measures market fluctuations. The “Journal” article noted that “Mr. Miekka said that the appearance of one signal is usually an indication of a market top, but the Omen becomes more accurate when there are two or more close together.”
The media reports surrounding the news of the Hindenburg Omen noted that it was behind every market crash since 1987, but also has occurred many other times without an ensuing significant downturn. Market analysts said that only about 25 percent of Omen appearances have led to stock-market declines that can be considered crashes.
Technical Analysis of the Stock Market
There are two primary types of stock analysts and traders. There are those who analyze equities based on fundamentals and those that make their buy/sell decisions on technical indicators. Wikipedia notes that “Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions and intra-market price correlations, cycles or through recognition of chart patterns.”
Technical analysis ignores the actual nature of the company, the market it serves or commodity. It is based solely on the price and volume information. However, fundamental analysis examines the actual facts of the company, market, currency or commodity. Usually, any large brokerage, trading group, or financial institution will have both a technical analysis and fundamental analysis team.
There are several prominent indicators that technical analysts follow. These include price of the stock, its moving average, its support and its resistance. Volume of trades is also an important indicator to technical analysts because they feel it helps to establish the conviction of traders. Support and resistance levels are often used by this type of trader to determine entry and exits. Moving averages help determine a change in a trend by measuring buying and selling pressures.
There are several other tools that the technical trader might use to make trading decisions. These include: market internals, Bollinger Bands, ADX indicator, Stochastic, relative strength index and moving average convergence divergence (MACD). All of these technical indictors and tools are designed to remove the emotional considerations from the trading of equities.
Technical analysts tend to favor ominous sounding titles for stock market gyrations that they feel are precursors to dramatic changes. Joining the Hindenburg Omen in the Byzantine lexicon of technical indicators are the “Death Cross,” which is a type of candlestick pattern that is used by traders to signal a reversal in the current upturn and the “Bearish Abandoned Baby,” which Investopedia defines as “a crossover resulting from a security’s long-term moving average breaking above its short-term moving average or support level.”
Is a Big Crash Imminent?
Investors from Wall Street to Main Street, all rocked by the recession of 2008, are more than a little spooked by anything – especially something as ominous sounding as a Hindenburg Omen – that might roil their financial future. If this latest threat proves to be accurate, the meltdown is predicted for mid-September 2010.
However, many if not most analysts are not ready to cash in their portfolios and put the money in the mattress. Joseph Battipaglia, chief marketing strategist for Stifel Nicolaus, was quoted in several business publications and the Wall Street Journal as saying that “We always love good conspiracy theories.”
Whether the Hindenburg Omen is destined to decimate the portfolios of investors remains to be seen. However, if the technical indicators are to be believed, investors should get ready for a long, cold winter. On the other hand, these Omens, Death Crosses and Bearish Babies could be coincidences or market anomalies that will be corrected by good fundamentals or economic events that trump the technical indicators. The best advice is always: caveat emptor.