Is It Time to Head for the Hills?

by: Andrew Butter

I must say the “Death Cross” of the 50 Day MA and the 200 Day MA came and went without much drama, but perhaps complacency was misplaced; certainly the S&P 500 has been looking a little “wan” recently.

But now – terror!

There is apparently a Hindenburg on the prowl looking to gobble up naughty children who aren’t good. And it’s official, not that I would know because every time I try and understand the logic I nod off before I even get halfway through. But I’m sure that there are those with superior attention spans than mine, and I’m sure they are right. Take, for example, Robert McHugh, PhD.’s recent article in Market Oracle: Hindenburg Stock Market Crash Omen Confirmed.

Robert McHugh is an expert on stock-market crashes, he warned of one in January 2008, February 2008, March 2008, July 2008 (good one), September 2008 (pretty good also), and May 2008 (well not yet at least).

Crashes are his thing though, bounces clearly are not, as, for example, he didn’t warn of the 80% bounce that started in March 2009.

But anyway, he helpfully provided a table of the number of Hindenburg Omens that were spotted from 1986 to now (you need anywhere from 1 to 36 to get a crash), and the size of the crashes that followed.

Right now a grand total of two have been spotted. Here are some more statistics (if history repeats):

  1. The correlation between the number of Hindenburg Omens spotted and the size of the crash is about zero, the good news is that means the next crash (if it happens) could be either very mild, in between, or catastrophic (equal chance of any one of those options).
  2. There is a reasonably good correlation between the period of time the last “Omen” was sighted (45% R-Squared), and the size of the crash. What that says is that if the next crash comes within the next two months (you restart the clock if another one is spotted), then on average it will be 7% (ranging from 5% to 20% at the 95% confidence limit).

Although one thing is that the numbers of “Omens” to produce a crash has gone down quite dramatically, if you run the numbers from 1995 there is a 67% correlation between the time from the “critical” Omen and the crash, and that says that if nothing un-toward happens for two months the potential crash (if it happens) will be 8% (5% to 22% at 95% confidence).

So even if the "Omen" is upon us (again), there is probably time to pack a bag before heading for the hills (that’s of course if the Black Cross doesn’t get you first).

P.S.: I'm just wondering if Hindenburg was any relation to that guy Heisenberg (he of the Uncertainty Principle)?

Disclosure: "Neutral S&P 500"