by Steve Visscher, Mawer Investment Management
I had a friend ask me this week about the Hindenburg Omen. The Hindenburg what I replied? Isn’t that the German passenger blimp that exploded in the 1930s? Yes, but the Omen is a market signal that has foreshadowed every major market decline over the past 25 years. It was just triggered last week so the market crash is imminent. Intrigued, I decided to investigate further.
First, some background. The Hindenburg Omen is an alignment of several rather technical market conditions. In simple terms, a Hindenburg signal is triggered when a significant number of stocks on the New York Stock Exchange set 52-week highs at the same time as a marked number of stocks set 52-week lows (coupled with some additional market breadth conditions). A cluster of two or more signals over a 36-day period must occur for the more dreaded Hindenburg Omen to be verified.
Interestingly, the Hindenburg Omen has actually been a precursor to recent market declines. Whether it was the market crash of 1987, the bear market in 2000-2002, or the 2008 economic crisis; in each case, the Hindenburg Omen was triggered prior to these events. With that type of track record, shouldn’t everyone be following its ominous warning signals?
Only with a word of caution. The Hindenburg Omen also results in some false readings. In August 2010, a cluster of signals triggered the Omen. With much fanfare, the original proponent of the Hindenburg Omen, and many of those who believed in its accuracy, sold their equity positions. Since then, US equity markets have gained approximately 60%. No word on if, or when, their computer models signaled them to re-enter the markets.
So will the Hindenburg Omen that was triggered last week foreshadow an imminent market decline, or is it merely a spurious indicator that lacks predictive power?
Time will tell. But we won’t be following this story too closely. Trading indicators like the Hindenburg Omen make for an interesting discussion, but our success at compounding clients’ wealth over the last 39 years has been through shunning short-term thinking, and instead, executing our philosophy that is rooted in a long-term perspective. And in the long-run, I have much more confidence that the collective wisdom of my colleagues can compound wealth better than any computer can.
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