THE BLOG
11/02/2010 07:52 pm ET Updated Dec 06, 2017

The Hindenburg Omen Crashed

I admit I don't understand the Hindenburg Omen, much less what triggers it. I do know anything that combines "Hindenburg" with "Omen" can't be good!

The Hindenburg Omen is a technical analysis pattern that is supposed to be able to predict a stock market crash. You can find a more detailed explanation here.

The financial media is enamored with the Hindenburg Omen. It has a certain mystique about it, perhaps because its originator is Jim Miekka, a blind physics instructor.

The Omen was triggered on August 13, 2010 when the S&P 500 index fell 3.4% for the week. When it goes off, investors are supposed to get out of the stock market. The media pounced on the significance of this event.

According to a Bloomberg article, Albert Edwards, a "strategist" at Societe Generale SA, noted the Hindenburg Omen may suggest "a savage equity downturn is imminent." As if that dire warning was not enough, Mr. Edwards opined: "Equities are tottering on the edge as increasingly recessionary data becomes apparent. It would not take much to tip them over that edge."

A headline on Jim Cramer's The Street blared: "Hindenburg Omen Reached Again: Is a Stock Market Crash Imminent?"

The once venerable Wall Street Journal weighed in with this observation: "Forget about Friday the 13th. Many on Wall Street took to whispering about an even scarier phenomenon -- the 'Hindenburg Omen.'"

Over at Seeking Alpha, a blog by Cullen Roth asked: "Hindenburg Omen: Savage Downturn Ahead?" Mr. Roth, who claims to have foreseen "many" of the events leading up to the financial crises, took note of Mr. Edwards' views of the significance of this indicator, and weighed in with this closing observation: "It might sound like another silly technical indicator, but with a track record like that it might be worth noting..."

A blog at CNBC asked: "Time to Fear the Hindenburg Omen?" The author quoted a trader who hedged his bets about the significance of the Omen, but direly noted that the NYSE was "...developing a head-and shoulder reversal pattern, which is not yet fully verified." According to the trader, this is "...a rare double-right shoulder, but the same pattern as 1930."

That's either very bad or errant nonsense. You know where I come out.

Many investors, spooked by these reports, no doubt "fled to safety" and dumped their stock holdings.

So what happened in September? The markets surged. The S&P 500 index was up a whopping 8.92%!

The financial media thrives on sensational headlines to boost ratings. It understands fear sells. All the better if it can be packaged in complex terminology. After all, someone who can identify a "rare double-right shoulder" must know what he is talking about, right?

No one seems to care that misinformation about the value of any magical predictor of random future events is harmful to investors. The financial media needs to keep the myth of its value to you alive. If you knew the truth, you would stop reading and watching the shameless charade of what passes for "financial news."

William Bernstein, the author of The Intelligent Asset Allocator, said it best: "Turn on CNBC and you're faced with an asylum narrated by the Three Stooges. But look at market behavior over a 50-year horizon and you've got a well-manicured lawn, tended by Paul Samuelson and Bill Sharpe."

But here's the problem with Bernstein's well-reasoned analysis. There is no "Index Fund Omen."

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