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Hindenburg Omen Misconceptions

Since it occurred in Sept 12th and its confirmation on August 20th the Hindenburg Omen has been a buzz on Wall Street thanks to its assumed market crash predictive capacity, My purpose is not to validate it: several technical analysts have done that already and arrived to the same statistical results. Going from there I am going to explain how we must use these results in order to make educated decisions. More over I will look at it from a different perspective by adding another data the shape of the yield curve.


Google Trend for Hindenburg Omen

Yes Folks, Hindenburg Omen Tripped Again from the Wall Street Journal.

Hindenburg Omen on Wikipedia

Mixed Signals and the Hindenburg Omen from Forbes


Since it first occurrence most of the bloggers and journalists have explained us that the Hindenburg Omen had no value because it gave false signals 75% of the time.

This is true and even its creator, Jim Miekka himself, admits it: he says that although it is a necessary condition for a crash it is not sufficient.

"But the essential issue here is one of insurance, with a relatively modest premium, against a potentially catastrophic, very low probability event."

We must act as risk neutral investors so we must study the probability and the return of the two possible outcomes:

1 - How much would you make if you didn't sell and the market was up (probablility 75%) = G.

2 - How much would you lose if you didn't sell and the market crashed (probability 25%) = L

Your expected return would be 0.75 * G - 0.25 * L if this is higher than 0 you must keep your position and follow journalists and bloggers. If the result is negative you must sell (or even short sell) and watch the outcome.

Yield Curve:

As I indicated in my article The Yield Curve Twist Omen:

All the Market Crashes we have witnessed have been the result of the yield curve suddenly returning from undervalued to normal. That was true for the "sub prime crisis" as it was for any other crash in history : it is the only way to account for a discontinuity in stock market value.


By incorporating this condition of an undervalued yield curve most probably we would get a lot more false signals. It is not my purpose here to re test the Hindenburg Omen under these constraint, others have far more qualifications in that domain than I do.

As I showed in that article the yield curve was exceptionally undervalued on August 25th and started twisting toward its fair value.

Note: that the first manifestation of the Hindenburg Omen was on a 30 Years US Treasury Bond auction. The next one is on Sept. 9th.

It is very possible that given the dismal auction I expect that we get another occurrence of the Hindenburg Omen on that date.

Conclusion:

Given the expected return and the inverted yield curve configuration we have had on August 25th any risk neutral individual should get out of the market (and even sell short) and see how this will develop. The probability of a crash is obviously much higher than the 25% that resulted from previous tests of the Hindenburg Omen. Better safe than sorry.


Deus in Machina: 6, 5, 4, 3, 2, 1, 0

As I explained in Financial Nemesis Timing : FND - 6. the most probable date of the crash is between Sept 9th and Sept 17th with the highest probablility on Sept 17th.

Facebook:

Events:

The Market Crash: Be Prepared.

Post Crash Economy - Economic Non Compliance Week.

Page:

The Post Crash Economy

Groups:

Prepare for Market Crash Before September 9th.

The Religious Interpretation of Employment, Interest, and Money.

Libertarians Against Credit.

Muslims Against Credit With Interest.


 



Disclosure: No Positions