The Hindenburg Omen: The Real Thing or Hot Air?

Tuesday, August 17, 2010
By Paul Martin

Robert Wenzel
EconomicPolicyJournal.com

This weekend Zero Hedge reported that on Thursday “the feared” Hindenburg Omen made an appearance.

Wikipedia notes that:

Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty-days.
The last Hindenburg Omen occurred during the lows of 2009.

So is the Hindenburg Omen the real thing or hocus pocus? First to the negative, it appears that the discoverer of HO appears to have just ran various empirical back tests. As far as I am concerned, it is not very impressive to find an indicator via back testing and just running with it. In fact, empirical testing as an investing method generally results in investments that blow up, see Long Term Capital Management and subprime mortgages. That said, I am never against looking at a formula to see if it can be understood in terms of human action, to indeed see if it can show some promise as a solid indicator. So let’s take a look at how HO is determined:

The 5 Criteria (Via ZH) That Must be Triggered for an HO moment to be considered activated:

1.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.

2. 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.

3.That the NYSE 10 Week moving average is rising.

4.That the McClellan Oscillator ( a market breadth indicator used to evaluate the rate of money entering or leaving the market and interpretively indicate overbought or oversold conditions of the market)is negative on that same day.

5.That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs).

The Rest…HERE

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