Should We Beware 'The Hindenberg Omen'?

by: Roger Nusbaum

Well this is a new one on me: the Hindenburg Omen. Wikipedia has a page on it and Michael Kahn mentioned it in his column yesterday.

Per Wikipedia: "a divergence of stocks making new highs and stocks making new lows creates a higher probability for a crash."

I was on Capital Connection on CNBC Europe about a week and a half ago and felt quite certain we would be in for more volatility. I was on again last night and said I expect volatility to continue.

From a slightly bigger picture viewpoint, all of the things that the worriers have been talking about like the carry trade, threat of an economic slowdown, subprime and so on have all contributed to the selloff.

There has been no shortage of commentary about what these things will mean to stocks, so the market action of the last week or so should not be a total shock. The market is always worried about a bunch of things, this is obvious. It makes sense to be cognizant of the market's current fears and make some sort of assessment for yourself about how real the threats are and what is a reasonable bad case scenario.

For example I do not think the fundamentals of the subprime issue will be anywhere near as bad as the doom and gloomers think. However even if the fundamentals aren't so bad (or more aptly so widespread) that does not mean that the pounding thus far in the financial sector won't get worse because it could.

The emotions that move the market short term will matter more for the next couple of weeks (or longer?) than whatever the realities of the fundamental story are.