What do the 1937 Hindenburg zeppelin and the stock market have in common? They both have a tendency to crash. In May 1937 the Hindenburg zeppelin crashed and burned completely. The Hindenburg Omen was named after this catastrophe to show a package of technical signs that the market will crash.
Hindenburg Omen 5 Criteria
There are 4 criteria indicating the market will crash according to this technical analysis pattern:
- 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.
I've read about the Hindenburg signs from several sources over the summer, as the stock market keeps reaching for new highs. From my research, one of the first guys who reported it was our friend Tyler Durden from Zero Hedge, back in April. According to his article, the only thing that saved us from a Hindenburg market crash in 2010 was Super Ben and the trillions injected on Wall Street to buyback more bonds (QE3).
Markets Heading Higher – The Fed Heading Lower
While stock markets keep beating their previous highs, the Fed is seriously thinking of slowing down its quantitative easing measures. Some experts predict (because this is what experts do… they predict!) the Fed to announce their first slowdown manoeuvres as early as September.
In other words, if the Fed doesn't buy $85B bonds per month, interest rates will continue to go up as they were artificially held down by QE3. If interest rates go up, it will affect consumer consumption as more money will have to go towards interest debt repayment. The same is very true for companies which is always bad news for Wall Street.
Hindenburg Omen – Self Fulfilling Prophecy?
Since April, many financial journalists have reported about the Hindenburg omen and educated us about the potential market crash. Hindenburg or not, when it's been a long while that the market has been going up, we always find people to say that it will go down. Well… huh… it doesn't require a math Ph.D to call that when something is going up, it will eventually come down. It's like saying "it will rain" after 5 days of sun. You might be wrong on the 6th day, but sooner or later, you will be right! That's pure stats!
So is it because everybody seeing Hindenburg in the sky that it will truly fall on us? Or is it because everybody thinks the sky is falling that the market will truly crash? Quite a rhetorical question…. The chicken or the egg?
Am I Going to Run From The Hindenburg Omen?
If you have been reading this blog for a while, you know that I'm not a big fan of technical analysis. As is the case with many investing strategy, the concept works in theory and there is always a good reason why it doesn't work when the event that some guru called didn't happen. After all, those who followed the Hindenburg Omen back in August 2010 and sold their positions lost an opportunity to make a lot of money. From August 2010 to August 26th 2013, the S&P 500 increased by 47%:
This is not counting dividend payments. And this is also not counting that the most courageous probably entered into a short selling position to benefit fully from the Hindenburg technical analysis pattern. Unfortunately, we can't control the market nor control Big Ben!
Remember the Reason Why You Invest
I constantly remind myself of the reason why I invest in the stock market: to build a nest egg for retirement. Since I will retire in roughly 30 years from now, there is no point for me to be concerned about a Hindenburg crash. On the other hand, if I was really convinced it was going to happen; I would trade online and enter in a short position to make money out of this event. So if your investing goals are not enough to convince you to stay in the market because you think that it will crash, then you should short sell the market. It's too risky? Well… then it's because you don't believe enough in the Hindenburg Omen theory!
I invest in stocks I have because I am convinced they will generate profits and pay dividends in the future. This is why I put my money in these companies. If I was convinced they would crash and burn like a zeppelin, I would definitely short sell them and make a lot of money the other way around. In the meantime, I would rather cash in my dividend payments and watch the event on TV like many people did when the real Hindenburg crashed a long time ago.