An Undeserved
Omen
Bottom
Line: The “Hindenburg Omen” is one of those pieces of market lore,
predicting a crash, that more appropriately belongs on the
bench.
Something I’ve been asked about a few times in the past week is an
ominous-sounding signal called the “Hindenburg Omen”. Getting background
information on its discovery is difficult at best, and quite frankly I’m not
sure to whom it should be attributed. I’ve seen references to Norman
Fosback, Ian McAvity, Kennedy Gammage and – I’m serious – a blind math genius
in Florida by the name of Jim Nieska. Just as there are varying
interpretations of who invented the signal, there are variations on how it
should be computed. To simplify things, I’ll just go with Ian McAvity,
whose suggestion is to look at a 5-day moving average of new highs and new
lows on the NYSE. If both moving averages are greater than 2.4%
of the total number of stocks traded, then we have a Hindenburg Omen.
The theory is that a great deal of uncertainty in the market, characterized by
a large number of new highs and new lows at the same time, occurs before major
market meltdowns. As usual, this is true (but only a little
bit).
The usual examples given for this phenomenon are the ones that occurred
before the crash in 1987, before the sharp drop in 1990, before the mini-crash
in 1998, near the top of the bubble in September 2000, before 9/11 in
September 2001, and lastly before the waterfall decline in July 2002.
Just looking at those examples, it makes one shiver – it’s uncanny how the
market slid precipitously soon after such signals. Unfortunately, or
fortunately depending on how you look at it, that’s only half the truth.
Typically, examples that go against the theory are simply left out, like the
one at the low in March 2001, or the low in October 1998, or the low in
December 1991, or – and this is the best one – the one that occurred very near
the ultimate low in July 1982. It is coming up now because the signal
occurred nine days ago on 04/14/04.
Instead of giving you my opinion on what this signal may or may not
mean, below is a table showing every Hindenburg Omen since 1965.
|
Hindenburg
Omens
5-Day
New Highs and 5-Day New Lows Both at Least 2.4% of Total
Issues
1965 -
2004 |
|
Date of
Signal |
New
Highs |
New
Lows |
10 Days
Later |
30 Days
Later |
60 Days
Later |
90 Days
Later |
120 Days
Later |
252 Days
Later |
|
03/31/65 |
3.7% |
2.4% |
2.4% |
4.8% |
-3.6% |
-0.3% |
4.2% |
3.0% |
|
11/23/65 |
5.7% |
2.4% |
-0.5% |
1.4% |
1.0% |
-2.0% |
-8.0% |
-13.2% |
|
05/31/67 |
2.7% |
3.0% |
3.7% |
3.7% |
4.5% |
9.2% |
2.9% |
12.2% |
|
10/11/67 |
6.3% |
2.5% |
-1.9% |
-2.6% |
0.1% |
-5.3% |
-2.6% |
9.1% |
|
03/29/68 |
2.6% |
6.8% |
7.1% |
8.8% |
10.2% |
9.4% |
14.8% |
16.5% |
|
03/27/69 |
2.6% |
6.0% |
0.5% |
3.7% |
-3.7% |
-7.0% |
-5.8% |
-11.3% |
|
09/22/69 |
2.5% |
5.0% |
-2.4% |
1.6% |
-6.2% |
-10.4% |
-8.1% |
-13.6% |
|
03/25/70 |
2.6% |
5.2% |
-1.4% |
-11.1% |
-14.8% |
-13.1% |
-8.6% |
11.7% |
|
05/13/71 |
2.7% |
2.4% |
-3.2% |
-4.6% |
-8.9% |
-3.3% |
-9.3% |
2.7% |
|
10/06/71 |
2.7% |
2.5% |
-4.2% |
-7.0% |
2.3% |
5.3% |
7.5% |
10.5% |
|
03/22/72 |
3.2% |
2.7% |
2.5% |
-0.6% |
1.4% |
0.5% |
1.5% |
2.8% |
|
10/26/72 |
2.5% |
3.3% |
2.5% |
7.3% |
4.9% |
2.6% |
-0.9% |
-1.5% |
|
01/16/73 |
2.8% |
2.8% |
-1.8% |
-6.0% |
-4.7% |
-8.6% |
-12.4% |
-19.0% |
|
01/03/74 |
2.6% |
3.0% |
-2.5% |
-8.9% |
-5.8% |
-9.2% |
-10.8% |
-29.6% |
|
05/25/76 |
2.6% |
2.4% |
-0.8% |
4.5% |
3.9% |
4.7% |
0.4% |
-1.8% |
|
03/18/77 |
4.6% |
2.8% |
-2.6% |
-2.9% |
-2.0% |
-3.0% |
-5.4% |
-10.8% |
|
05/25/78 |
3.3% |
2.5% |
3.2% |
-1.6% |
7.3% |
6.0% |
-4.5% |
3.2% |
|
10/04/79 |
4.6% |
2.5% |
-6.0% |
-5.5% |
-2.0% |
7.0% |
-10.4% |
16.3% |
|
07/16/82 |
2.7% |
2.9% |
-3.6% |
5.4% |
21.1% |
20.8% |
27.8% |
49.5% |
|
07/23/86 |
2.6% |
2.7% |
-0.8% |
6.4% |
0.4% |
4.4% |
8.9% |
29.2% |
|
09/28/87 |
2.6% |
3.1% |
-4.3% |
-24.8% |
-22.7% |
-22.0% |
-16.1% |
-16.8% |
|
10/16/89 |
2.5% |
4.4% |
-2.3% |
0.9% |
1.7% |
-5.5% |
-0.8% |
-11.6% |
|
07/12/90 |
3.5% |
2.4% |
-2.6% |
-16.0% |
-14.8% |
-13.2% |
-10.7% |
3.2% |
|
12/06/91 |
2.5% |
2.5% |
2.1% |
8.8% |
8.0% |
9.8% |
9.6% |
14.0% |
|
02/23/94 |
2.9% |
2.5% |
-0.8% |
-4.2% |
-3.4% |
-5.2% |
-1.2% |
3.4% |
|
10/26/95 |
3.5% |
2.4% |
2.9% |
7.1% |
6.3% |
13.1% |
11.6% |
21.8% |
|
12/15/97 |
3.8% |
2.6% |
0.8% |
2.3% |
10.9% |
12.8% |
16.1% |
20.7% |
|
06/26/98 |
2.5% |
3.2% |
2.8% |
-4.4% |
-9.1% |
-2.0% |
2.5% |
17.5% |
|
10/05/98 |
2.4% |
7.6% |
7.5% |
14.9% |
24.6% |
24.4% |
32.5% |
31.6% |
|
04/12/99 |
2.5% |
2.7% |
0.1% |
-3.8% |
2.7% |
-1.9% |
-5.6% |
11.6% |
|
11/17/99 |
2.4% |
3.2% |
-0.1% |
4.1% |
-1.5% |
6.9% |
-2.0% |
-1.5% |
|
09/19/00 |
3.5% |
2.5% |
-2.3% |
-2.1% |
-6.8% |
-6.6% |
-18.0% |
-31.0% |
|
03/20/01 |
2.6% |
2.5% |
-3.2% |
10.9% |
6.8% |
5.5% |
-9.1% |
0.2% |
|
09/06/01 |
3.1% |
3.0% |
-9.0% |
-1.9% |
5.5% |
1.2% |
5.1% |
-19.6% |
|
06/24/02 |
3.0% |
3.0% |
-4.0% |
-13.4% |
-12.4% |
-10.3% |
-9.2% |
-0.9% |
|
|
|
|
Average
Return |
-0.6% |
-0.7% |
0.0% |
0.4% |
-0.4% |
3.1% |
|
Standard
Deviation |
3.4% |
8.1% |
9.5% |
9.8% |
11.4% |
17.3% |
|
% Positive |
37% |
49% |
54% |
49% |
40% |
60% |
My apologies to those who have to squint to see the numbers, but
formatting restrictions required a small font for this table. The
columns show, in order, the date the signal was first issued (note:
since we usually see many days in succession, I have shown only the first day
when the signal was generated, and any occurrences happening within two months
of another one have been eliminated, to get rid of “double-counting” to some
degree), the 5-day moving average of new highs as a percentage of total stocks
traded, the 5-day moving average of new lows as a percentage of total stocks
traded, and the performance of the S&P 500 index 10, 30, 60, 90, 120 and
252 days later.
There are a couple of things to note. After 10 days of the
initial signal, the S&P was higher only 13 out of 35 times, with an
average loss of 0.6%, so there may be a bit more negativity than usual
there. Also, in all time frames (even out to a year) the average return
is extraordinarily small, which is why I thought it would be instructive to
include the standard deviations of returns, which are large. What does
that tell us? It shows that while there may not be a distinct bias to
S&P performance after these signals, the market does tend to move well in
one direction or the other.
Perhaps there are some “tweaks” to this signal that I don’t know about
(such as requiring that 10 out of 30 days shows a signal, or that the S&P
has to trade below its 200-day moving average, or something similar), but as
it stands I don’t see a whole lot of forecasting ability for this
signal. I certainly don’t think it’s a bad “omen” for the market, as it
has kicked off its fair share of excellent rallies as well as waterfall
declines. It does seem to coincide quite often to the beginning of a
major move within a month or so, but there is really no telling if the move
will be up or down. I think it may be better to toss this one into the
“sounds good in theory, but…”
file.