Thursday, August 26, 2010

WSJ: 'Hidenburg Omen' Creater Sticks to Guns

If you are an avid reader of financial blogs, surely you have come across the "Hidenburg Omen" splattered amongst many web pages these past few weeks.  I have not touched on it because frankly I never heard of it until 3 weeks ago (same for 99% of those in the market), and it (to me at least) is sort of data set dressing to create a conclusion.  I could find every major crash and then find 5-8 things that were consistent before all of them (but also before many benign periods) and then put a cool name to it, and wave it around and scare people, but what's the point?.  "Before every crash there is at least 1 U.S. Congressman with first name John.  Further, there is always a named hurricane in the previous August, and snow has fallen in Wisconsin by Nov 13th of that year.  Always! Then we crash!*"

*Granted when those conditions hold we don't crash 80% of the time.

To that end I agree with Ritholtz's comments.  Further it has many false positives - i.e. 75% of the time.  That said, if we crash soon this gentleman in the WSJ story below will be a "Roubini" like force of nature and a new financial celebrity.  (or for you old timers, the anti Abby Joseph Cohen)  Ironically, with the S&P 500 not far from the "line in the sand" at S&P 1010... if that level breaks, Mr. Miekka may get his date with destiny.

I found the story interesting simply because it talks more about the guy who found the patterns, and his background...

  •  Jim Miekka has never worked on Wall Street and doesn't hold any financial degrees. But he has suddenly developed a cult-like following among some investors.  The 50-year-old newsletter writer is in big demand these days because of a technical market indicator he devised to predict stock-market crashes. Dubbed "the Hindenburg Omen" after the 1937 disaster of a German passenger airship, the indicator has been the buzz of talk shows, blogs and news articles after developing a following on trading floors from New York to London.
  • The Dow Jones Industrial Average has dropped 2.5% since the indicator was triggered the first of three times on Aug. 12. The market action has turned Mr. Miekka, a blind former high-school physics teacher, into a reluctant celebrity.
  • "I guess it feels good to be famous," Mr. Miekka says from his home in Surry, Maine. "But at the same time I wonder how the indicator is going to work in the future with all this attention."
  • Mr. Miekka devised the indicator using a formula that parses data including 52-week stock levels and moving averages of the New York Stock Exchange. Other criteria include a rising 10-week NYSE moving average and a negative technical indicator that measures market fluctuations. All these gauges must occur simultaneously on the same day to trigger the Hindenburg Omen. 
  • To some, it sounds like little more than hocus-pocus. Wall Street traders are skeptical, considering that the indicator has been triggered many times since Mr. Miekka devised it in 1995 without an ensuing major market selloff. Indeed, significant stock-market declines have followed the indicator just 25% of the time.
  • Barry Ritholtz, chief executive of Fusion IQ, an online quantitative-research firm, says the Hindenburg Omen is a backward-looking indicator that doesn't consider causation. He labels it "recession porn," contending that investors are attracted to negative commentary and conspiracy theories during skittish markets.
  • Mr. Miekka brushes off such concerns. He warns that the trio of Hindenburg Omen appearances this month doesn't bode well, especially since a cluster of occurrences tends to lead to more significant declines. He said it is possible the market could drop 20% from the first sighting two weeks ago.  "It's like a funnel cloud," Mr. Miekka says. "You don't get a storm with every funnel cloud, but now that we're seeing several funnel clouds, I definitely think I want to stay in the storm cellar." 
  • Despite the publicity surrounding the Hindenburg Omen, his obscure investment newsletter, which has just 100 subscribers, hasn't fared quite as well.  He says: "I've gotten maybe five or seven inquiries and one subscriber."

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