Capital Markets

Doom. Doom! DOOM!!!

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It's reliable as a clock that's accurate 25 percent of the time.

In the mood for arcane mathematical theorems prophesying market corrections? Say Guten Tag to the Hindenburg Omen, a technical indicator so abstruse it makes the hemline theory seem practical—except that the phenomenon, which occurred last Thursday, has preceded every major stock market crash.

The Wall Street Journal's Steven Russolillo and Tomi Kilgore report on a new panic over a coming September correction. The cause? Here are the official Hindenburg Omen criteria that were met last week:

  • That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.
  • That the smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues.
  • That the NYSE 10 Week moving average is rising.
  • That the McClellan Oscillator is negative on that same day.
  • That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.

What does all that mean? The formidable L.A. libertarian pundit Marko Budgyk explains:

[Mathematician Jim] Miekka came up with the Omen in 1995 as a way to predict big market downturns, developing a formula that parses data like 52-week New Highs and Lows and the moving averages of the New York Stock Exchange.  He said the HO's name was coined by a fellow market technician, Kennedy Gammage, when they found out the name "Titanic" already had been taken.

The confluence of data used by the Omen was officially tripped this week.  There were 92 companies that hit new 52-week highs on Thursday, or 2.9% of all companies traded on the New York Stock Exchange. There were also 81 new lows, or 2.6% of the total.  Each number must exceed 2.5% for the Omen to occur, according to Mr. Miekka.

The Omen was behind every market crash since 1987, but also has occurred many other times without an ensuing significant downturn.  Market analysts said only about 25% of Omen appearances have led to stock market declines that can be considered crashes.

Even the experts, however, aren't in agreement.  Robert McHugh believes that we have had one HO, which occurred on August 12th.  He maintains that the HO is NOT confirmed.  And, from McHugh's work, the trigger is 2.2% New Highs and New Lows, not the 2.5% that Miekka believes.

That 25 percent figure suggests the phenomenon should actually be called the "One Hindenburg and Three Goodyear Blimps Omen." As important as the capital markets are to all manner of retirement and pension issues, the performance of the NYSE at this point is so unrelated to reality on planet Earth that the question isn't so much "Will there be a crash in September?" as "Would it matter?"

Then again, when the McClellan Oscillator, the Elliott Waves and the Hindenburg Omen are all lined up the same way, that's gotta mean the King of Terror will come from the sky and bring to life the king of the Mongols.

NEXT: How We Doing So Far in Our Predictions For Mad Men, Season 4?

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  1. Doom. Doom! DOOM!!!

    Now if we could just have a thread called “Shut the Fuck up, Lonewacko”….

    1. I’m still waiting for my royalty checks to start coming in, by the way.

  2. the performance of the NYSE at this point is so unrelated to reality on planet Earth that the question isn’t so much “Will there be a crash in September?” as “Would it matter?

    I know i am super critical of Tim so to counter that i will have to say this is an great observation.

  3. So…I shouldn’t have named the fourth ship in my dirigible fleet The Black Swan?

  4. If the portents do NOT include something blowing up, how can you call it the Hindenburg Omen?

  5. “Charts are great for predicting the past.” — Peter Lynch

    “I realized technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.” — Warren Buffett

    1. I always love Buffet quotes. Especially when then they are directly contradicted by his actions. He employs more than one technician.

      He also doesn’t trade, no really his firm doesn’t trade.

  6. “Charts are great for predicting the past.” — Peter Lynch

    Mr. Lynch doesn’t pay much attention to climate change science.

    http://wattsupwiththat.com/201…..-et-al-99/

    1. ButButBut the science is settled.

    2. Well, to be fair, the quote isn’t about creating models using indirect proxy measures.

      Interesting article. Will be interesting to see how it is received. Nothing in it seems to be too earth shattering (based on a quick browse), but it brings up some interesting points.

      1. but it brings up some interesting points.

        Denialist!!!

        1. ;^)

          Of course, I hope people realize that Mann’s hockey stick graph is not in any way essential piece of the argument for AGW. A point included in the introduction to McShane and Wyner’s article, btw.

  7. I’m not putting any money on this until I see which indicator the headless chicken lands on.

    1. It always lands on bailout.

  8. Really? No one even tried to work a “oh the humanity” into a comment?

    1. I was hoping for a Damien photo.

    2. done to death, but still worth a snort and chuckle

      http://www.flickr.com/photos/ulrichp/1362599/

        1. WTF? can’t link?

        2. You too, eh? I thought I must have screwed up the tag, but maybe the squirrel is napping.

  9. Just for the record, the old saw about how the market has correctly predicted five of the last three recessions goes even farther back, I’m sure.

    This does present an excellent opportunity for people to learn about stuff like options. Everybody should know about the covered call at the very least.

    And “what if” scenarios are always healthy. What would you do if another “flash crash” hit on Monday? How could you profit from another Black Monday ’87?

    It’s like a fire drill. You should know what you’d do if a fire broke out in the kitchen and spread to the stairway in the middle of the night–the best time to figure out what you should do in response to something like that isn’t when it happens.

    Don’t be an Obama. Don’t be like Dubya Bush. They both made stupid decisions specifically because they waited to figure out…

    1. Just for the record, the old saw about how the market has correctly predicted five of the last three recessions goes even farther back, I’m sure.

      Use to be true of most every economist but in the age of CNBC economist don’t do that any more except for the Austrians and a few late comers like Roubini.

      However, as much as CNBC deserves a swift kick in the nuts, I wont discount the quarter of a century post Volker Recession where the bad times did smooth out as a result of a one time sane policy era as one significant factor in the change in attitude in the mainstream of the profession. Still, success made them soft and doughy.

  10. “As important as the capital markets are to all manner of retirement and pension issues, the performance of the NYSE at this point is so unrelated to reality on planet Earth that the question isn’t so much “Will there be a crash in September?” as “Would it matter?”
    Gee whiz its not like the 2008 crash did any harm to the economy and cause some very crony moves to be done by the government or anything…

  11. Ah, always fun to watch market analysts trying to isolate causal relationships in an insanely interconnected environment, especially when they spend half their time trying to figure out what they should be trying to figure out. Seriously though, lists of past and present market prediction formulae make for hilarious reading. “Predicting market fluctuations based on the volume of sock production? Wha…?”

    Fundamental principles of macroeconomics: Easy to understand and apply (as long as you aren’t part of a government agency, it seems).
    Fundamental principles of microeconomics: Easy to understand and apply.
    Synthesizing said principles into a scalable economic theory that accurately models reality: Heh, good luck with that.

    1. Cause and effect is a useful concept, but it is important to step back every now and then and recognize that everything is caused by everything else and in large systems, there is never a simple binary cause-effect relationship between things.

  12. He said the HO’s name was coined by a fellow market technician, Kennedy Gammage, when they found out the name “Titanic” already had been taken.

    Teh google is not very clear; anyone know what ‘The Titanic Omen’ is in relation to the stock or other financial markets?

    1. – 500 (maybe 400, forgot) point rally
      – new lows > new highs (NH>NL) for Dow companies shortly after rally

  13. palladium says no crash.

  14. Capitalism is on its last legs. But it’s not the market; it’s global warming that will do the old system in. Nice party while lasted, though.

    1. Which party is that?

    2. Which party is that?

      1. Weird, I wonder how that happened.

        1. a question so nice it had to be asked twice!

      2. This Party

        Your welcome for the repetitive song in your head.

    3. Democracy is on its last legs. But it’s not the voters; it’s capitalism that will do the old system in. Nice party while it lasted though.

      1. Humanity is on its last legs. But it’s not the people; it’s democracy that will do the old system in. Nice party while it lasted though.

        1. The Earth is on its last legs. But it’s not entropy; it’s humanity that will do the old system in. Nice party while it lasted though.

    4. Capitalism is on its last legs, to be replaced by a boot stamping on a human face, forever. (Apologies to Orwell)

  15. Really? No one even tried to work a “oh the humanity” into a comment?

    Nothing funny fits into “Oh the ______ equities.”

  16. I think it’s good that Mr. Cavanaugh doesn’t have a real job, otherwise he wouldn’t be able to keep up with arcania like this.

  17. Future looks grim.

  18. There’s some rationale behind the Hindenburg Omen.

    The kind of market action it flags would be consistent with an extremely overbought market (all those new highs) that is out of gas (all those new lows), one with a great deal of uncertainty (they are simultaneous). Uncertainty generally resolves into sell-offs.

    No technical indicator should ever be traded in isolation. Good technicians trade when two or more technical flags go up.

  19. The kind of market action it flags would be consistent with an extremely overbought market (all those new highs) that is out of gas (all those new lows), one with a great deal of uncertainty (they are simultaneous). Uncertainty generally resolves into sell-offs.

  20. Even the experts, however, aren’t in agreement. Robert McHugh believes that we have had one HO, which occurred on August 12th. He maintains that the HO is NOT confirmed. And, from McHugh’s work, the trigger is 2.2% New Highs and New Lows, not the 2.5% that Miekka believes.

  21. The Wall Street Journal’s Steven Russolillo and Tomi Kilgore report on a new panic over a coming September correction. The cause? Here are the official Hindenburg Omen criteria that were met last week

  22. The confluence of data used by the Omen was officially tripped this week. There were 92 companies that hit new 52-week highs on Thursday, or 2.9% of all companies traded on the New York Stock Exchange. There were also 81 new lows, or 2.6% of the total. Each number must exceed 2.5% for the Omen to occur, according to Mr. Miekka.

  23. Good technicians trade when two or more technical flags go up.

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