Last August, a well-publicized technical indicator called the Hindenburg Omen predicted an impending market crash.
The only thing that ended up crashing was the Hindenburg Omen itself.
In fact, since mid-August, after a flurry of media reports saying that the “omen” signaled a pending market meltdown, the S&P 500 had run up nearly 17% as of last Thursday.
The Hindenburg Omen, like many other such indicators, often gives false signals, analysts say.
Named after the German dirigible that exploded over New Jersey in 1937, the Hindenburg Omen is based on the number of new highs and new lows on the
New York Stock Exchange, and attempts to gauge market instability.
Not everyone appreciates the attention it receives.
Using an indicator to predict a market crash is “a bit of a parlor trick that adds to the skepticism regarding technical analysis,” said Richard Ross, a global technical strategist at Auerbach Grayson and Co. Inc., an institutional brokerage firm.
Jim Miekka, creator of the Hindenburg Omen and publisher of The Sudbury Bull and Bear Report newsletter, acknowledged that his now-famous indicator gives false signals about 75% of the time.
But the omen is “like a funnel cloud that bears watching,” he said. It predicted a “big drop” in 2008 and gave another sell signal last month, to which few paid attention.
Mr. Miekka now is bullish on stocks, based on his own calculation of The McClellan Summation Index, a cumulative measure of market breadth, or an analysis of the number of stocks that are rising versus those declining. Since more stocks now are going up, the market’s breadth remains positive, he said, but if declining stocks begin to outpace advancers — and the Hindenburg Omen also flashes a sell — Mr. Miekka predicts the market “is going to go down big.”
A NUMBERS GAME
“I don’t completely dismiss it,” Mr. Ross said of the omen, “but you can do data-fitting on any indicator” and make it work in hindsight.
Newsletter writers “have to make predictions” in order to attract subscribers, said Greg Morris, chief technical analyst at Stadion Money Management Inc., which runs $5.7 billion in assets.
But making predictions is “a terrible way to manage money,” said Mr. Morris, who has collaborated with Mr. Miekka.
Last summer’s Hindenburg mania led to other reports about scary indicators, including the “Death Cross.” This ominous-sounding indicator, also known as the negative “Golden Cross,” occurs when a short-term moving average pierces a longer-term average on the downside.
During the week of June 27, the 50-day moving average on the S&P 500 crossed the 200-day line, said Peter Mauthe, president of Rhoads Lucca Capital Management Inc., which manages $125 million.
That sell signal could not have come at a worse time — the precise bottom of the summer correction, which would have been a great time to buy, not sell.
Investors who followed the Golden Cross signal got back into the market in October — at about 15% above where they sold. They are up about 7% since then, said Mr. Mauthe, past president and board member of the American Association of Professional Technical Analysts Inc.
He defends the Golden Cross, noting that despite some whipsaws, it has been a “really good indicator for longer-term investors,” getting them out in December 2007 near the pre-crisis peak and back into the market in June 2009.
Of more importance than a single indicator for technicians is the basic direction and action of the market.
A good sign for the markets now, analysts said, is that in November, the S&P 500 and other indexes broke through their prior highs from April, sold off, and then continued higher.
Some feel another correction is due, but technical analysts don’t argue with the longer-term trend — which is still up.
“The S&P 500 is at a multiyear high, and it’s had a nice methodical advance — not euphoric in nature,” Mr. Ross said. “It’s grinding higher, which is healthy.”
Markets around the world, including those in Europe, are in a similarly strong position despite the sovereign-debt crisis, he said.
Many stocks are overextended — trading well above moving averages — but when an overbuying situation persists, it is often a sign of strength, analysts said.
“A lot of stocks are extended, but only a handful show distribution patterns — pulling back and failing to go higher on rally attempts,” said Louise Yamada, founder of Yamada Technical Research Advisors LLC, a research firm.
Ms. Yamada thinks the market is still “in a repairing process” and might enter a choppy period for the next few years. Major bear markets last for 13 to 16 years, she said, “and we’re 10 years in.”
A key development, Ms. Yamada said, is to see if the averages hold above their prior highs.
The percentage of stocks trading above their 10-day moving averages is about 72%, Mr. Mauthe said, compared with 89% in November, when the market last set new highs since the 2007 peak.
“We have far fewer stocks participating in the rally than back in November,” which makes Mr.
Mauthe “a little concerned.”
He isn’t looking for a new
bear market, “but there will probably be a better opportunity [to get in the market] in eight weeks” or so as the market corrects.
But don’t be too sure. Technical analysts take the market as it comes and don’t believe they have a crystal ball. “Everybody wants the magic bullet, the perfect indicator, but they’re never going to get it,” Mr. Mauthe said.
E-mail Dan Jamieson at
[email protected].
