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  Hindenburg Omen Failures

September 28, 2010



This is an abbreviated sample of a comment posted for subscribers



Last month, we took a look at the Hindenburg Omen, an overly data-mined "market crash" signal.  It got a huge amount of attention at the time, and was looking prophetic for a couple of weeks, but has since petered out faster than King Jung il's assertion he's not a nepotist.


Arguments vary about when (or if) a Hindenburg Omen signal is rendered moot, but I'd say the market rallying is a pretty good sign that it's not working.  Actually, looking back at the Report from August, the S&P did decline about in line (or more) than historical averages, at least during the first few weeks.  It's the longer-term that's not looking as disastrous.


So let's go back to 1965 and look at every Hindenburg Omen, along with how the S&P 500 performed during the subsequent 30 days.  We'll separate out future performance based on if the market rallied well or fell hard during that first 30 days, to see if it had an impact longer-term.


By "rallied well", let's require that the S&P rise by at least +5% during that first 30 days, and also that the maximum gain is twice the maximum decline during that time.  For "fell hard", we'll require the opposite - a drop of at least -5%, with a maximum decline at least twice as large as the maximum gain.


1 Month


3 Months


6 Months


Max Gain

6 Mo. Later

Max Loss

6 Mo. Later

S&P rallies >5% with > 2-to-1 reward/risk (9 occurrences)
Median 0.2% 1.6% 4.9% 9.8% -4.2%
% Positive 56% 67% 100%    
S&P declines >-5% with > 2-to-1 risk/reward (20 occurrences)
Median 0.0% -0.2% 2.9% 6.7% -8.3%
% Positive 50% 50% 60%    
Any random time...
Median 0.9% 2.0% 4.0% 7.7% -4.5%
% Positive 59% 62% 65%    


From the table, we can see that there were 20 times the S&P fell hard during the first 30 days, versus only 9 times it rallied well.  That's right in line with historical expectations following the Omen.


What's interesting is how the S&P performed over the ensuing six months.  When the market bucked the Omen for the most part and did well during the first 30 days, then over the next six months it was positive every time, and the maximum gain averaged twice as large as the maximum loss during those six-month stretches.


When the market fell hard during the initial 30-day period, then it also showed a positive six-month return (which isn't too surprising given the market's long-term trend and tendency to rebound from shorter-term declines).  But the risk/reward wasn't nearly as positive as it was compared to those times when the market rallied after the Omen.

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