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The Hindenburg Hoax

I interrupt this political commentary for some brief finance blogging.

Over the weekend, the media [1] seized on something called the Hindenburg Omen [2]: a syzygy of financial statistics that supposedly portends stock market collapse.  The list of indicators that have to align just so to produce the Omen is so long I can’t even follow it myself. Here is how CNBC puts it [3]:

The omen is triggered when more than 2.2 percent of the NYSE Composite Index’s stocks are finding new highs while another 2.2 percent or more of the issues are creating new lows. The lesser of the two numbers has to be larger than or equal to 69. The NYSE 10 also has to be rising and the McClellan Oscillator — a measure of market breadth based on advancing and declining stocks — has to be negative on that day.

If all of those criteria are met then the warning bell sounds.

Got that?  Me neither.  Nor do I plan to waste my time figuring it out, for I can already tell that the Hindenburg Omen — like other examples of “technical analysis” — is buncombe.

Take any random data set, and one is bound to find some striking coincidence or other.  The larger the dataset, the more inevitable yet individually improbable those coincidences will be.  The stock market provides endless examples.  You’ve probably heard them before: “The stock market always goes up the day after NFC linebackers intercept more passes than AFC safeties,” or “A lunar eclipse on the West coast means that the market will go down.”  The technical name for this is data snooping.  Keep testing a set of random data, and eventually you will find a rule that fits.

Sometimes we are savvy enough to realize that these past correlations do not predict future moves in the market.  But, for some reason, when the correlations involve purely financial stats like trading volume or stock price movements, we are more easily suckered.  The academic literature has confirmed [4] what theory would predict: take any “technical indicator” such as the Hindenburg Omen, and it turns out that, even though it may seem to account for stock market outcomes during a given backward-looking sample period, it does no better average in subsequent periods. (The Hindenburg Omen isn’t even a very good piece of data snooping — even with past data, it only “works” about 25% of the time.)  Nevertheless, to this day, many people on Wall Street make their living as “technical analysts,” even though their methods have no more merit than homeopathy or astrology.

None of this means that the market won’t crash in September.  Still, if your broker calls you to make sure you’ve read the reports about the Hindenburg Omen, you should fire him.  He makes money by convincing you to make as many (unnecessary) trades as possible.  “Technical analysis” is just another way for him to egg you on.

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#1 Comment By Banned Dude Test On August 17, 2010 @ 6:31 am

Nostradamus anyone?

In the great new city
a conflagration engulfs the golden calf
both pauper and prince bow to the nameless one
the judges of york have allowed without shackle

The baldheaded prophet
advises multitudes to stay the ancient course
screams of derision, wails of a wounded beast
whence found the source of his keepings bankrupt

Five knights and the eastern man
flee the dirty pit, setting down the soiled paper
for as to no further use in this kingdom of hope
soon the cup overflows with indecision and weakness

Now only the Party of Nays
waits only for winds of forgetfulness
overwhelming the lesser minded and promising a
Great refudiation of many strangers througout the whole

#2 Comment By Doug Pascover On August 17, 2010 @ 6:43 am

Well, bunkum indeed, although if the market does crash in September, I’m going to start posting about the Bramwell Curse in which it is the author’s skepticism that makes predictions come true despite the softness of the original thinking.

#3 Comment By James Pannozzi On August 17, 2010 @ 9:11 am

Over the years market nonsense theories have come and gone, taking legions of fools with them- the chartists, the “technical analysts”, the random walkists, the “contrarians”. The scam had me fooled for over twenty years as I dutifully read my Wall Street Journal and Barron’s.

There are books, computer programs, analysts but it all comes down to infinite variations on the same trick – a bunch of insiders making money off of a group of deluded newcomers. Same trick everytime.

Good points on the random data sets and conincidence (sic)!

Both Republican and Democratic administrations feed us a never ending mishmash of economic fairy tales – the “recovery” is around the corner, job “growth” delayed, “free” trade is good… etc.. But the truth will be exposed in the coming economic collapse, already admitted by such insiders as David Stockman, former OMB manager under Reagan, that government policies have essentially destroyed the American economy.

Maybe in rebuilding from the ruins, the nonsense will stop. Maybe it never can, lest civil disorder become completely uncontrollable. We shall see.

#4 Comment By dfw555 On August 17, 2010 @ 9:25 am

If technical analysis is “buncombe” than so is 99% of whatever else passes for analysis in the stock market — most particularly fundamental analysis, which involves closely scrutinizing books that are often cooked, manipulated, and massaged in more ways than the Office of Special Plans distorts a piece of dubious intel from the near abroad. That’s to say nothing of the analysts one sees on CNBC, most of whom were predictably telling everyone to buy at the top in Oct. 07, and then were all doom and gloom at the major bottom (@ S&P 666) in March 09.

TA, for serious practitioners with actual money on the line, isn’t about holy grails. It’s about analyzing past price and volume behavior to look for recurring patterns that can be exploited in the future. Yes, the past doesn’t repeat, and yes, no pattern works all the time. But the present certainly does echo the past — pronouncedly enough to merit non-snooping, non-curve fitting study, which can lead to high(er) probability buy-sell decisions. Charts and indicators aren’t fail safe, but I’ll take them any day over Goldman Sachs, Cramer, Geithner, and the legalese + accounting tricks of most financial statements.

#5 Comment By TomT On August 17, 2010 @ 10:06 am

Austin Bramwell, a good and interesting article, and I enjoyed your work and agree that the issue is important.

That we are politically diverse from each other, and although I disagree with your conclusions here, your article makes good reading and has attracted comments.

I was once tuned in, and once part of the plans laid (albeit as a simple member of the voting public). Now old, and seeing what has worked and what has failed, I see clearly an impossible debt, a crushing acceptance of entitlement living, a decline in science, math, history, and philosophy, and, a dissappearance of the manufacturing base, and the agricultural industries. I see the decay of relations between ethnic and political groups, exaggerated and siezed upon by the opportunists. I see the decline in quality of politicians in charge at a federal level. I see a decay in public morality, and it’s Judeo-Christian foundation.

What I am NOT in tune with is the hope, and the miracles, and the inventiveness of the youth of our country. Which is not to deny that it might be there. But old people like me are pessimistic, and perhaps we can be forgiven for agreeing with the forcasts of the “doomsayers”.

I heard a lecture the other day by the local School District Administrator. A likeable and intelligent guy. He said, “If we can just get a few more federal funds, because the economy has been a bit slower to turn around than predicted, then maybe we can avoid layoffs and cutbacks. Because they say next year will be MUCH better than this one…”. In the crowd, I was shaking my head “no”, and he added, “Though some, apparantly, disagree.”

Yeah, some of us disagree.

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#7 Comment By Is he serious? On August 17, 2010 @ 6:47 pm

Perhaps Austin and I are of similar political leanings, but I’m very disappointed in his foolishness and the idiocy of the editorial review process for this information outlet. Not only does Austin admit that he is entirely incapable of understanding what the Hindenburg Omen is, but he’s also decided that in all cases, “past performance is not a guarantee of future results.” Based on his pseudo assessment which spans tech analysis to brokerage, items such as history, trending, and fiduciary responsibility are entirely meaningless. Isn’t that an odd position for a person who calls himself a conservative to take? Perhaps he should stick to the politics and not burden us with his uneducated musings on topics about which he is clearly incapable of writing. With that attitude, his broker should fire him for being an idiot client. He should feel lucky that his broker would actually care enough to bring something to the table and ask how he felt about where is assets are invested given the current turmoils in the marketplace. Austin has lessened himself in writing this and made the rest of us just a little more stupid for reading it.

#8 Comment By daddysteve On August 18, 2010 @ 10:27 am

I think the ability to do simple math is all it takes to predict our future. Don’t know how “china syndrome” can be a result of an equation but that’s what my calculator keeps giving me as an answer.

#9 Comment By Austin Bramwell On August 19, 2010 @ 2:25 pm

@Is he serious?
Please – I’m may be foolish, but I’m not so foolish as to have a full service broker whom I could even fire in the first place.

#10 Comment By Ashton On August 20, 2010 @ 9:12 pm

Another example, if any are needed, of the distance between a glib lawyer at One Chase Manhattan Plaza and the adults who manage money Uptown. Embarrassing.

#11 Comment By MattSwartz On August 22, 2010 @ 11:35 am

“We’re the adults who manage money uptown” might not be the most persuasive battle cry right now.

#12 Pingback By Sentigo Blog » Blog Archive » Worried About the Hindenburg Omen? Read This! On August 26, 2010 @ 12:55 pm

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