Forecasting Financial Doom in The Stock Markets

The Hindenburg Omen. Ooooooo-eeeeeee-ooooooo. Sounds like a Halloween horror flick, doesn’t it? Named after the iconic 1937 Zeppelin disaster, the Omen was brewed by a financial newsletter author and former physics teacher Jim Miekka, relying on a batch of backward-looking technical measurements to predict future market movement. According to The Wall Street Journal, (WSJ), Miekka’s Omen had predicted every market crash since 1987.

On Thursday, August 12, 2010, the Omen predicted another stock market crash. A really big one. You probably heard about it.

But August 12 came … and went. No crash. World still here.

What happened? Maybe the Omen didn’t mean anything in the first place. It’s called data mining. There’s a big data set of past performance in the stock markets. Tracked since 1926, there are all kinds of patterns in stock market performance that are intriguing, suggestive, even scary. When the data miner looks long enough at all this data, some kind of a pattern will pop out – statistically there have to be lots of patterns. The question is, will the patterns repeat?

And there’s the rub. As the same WSJ article also noted, “Significant stock-market declines have followed [the Hindenburg Omen] only 25% of the time. So there’s a high likelihood that the Omen could be nothing more than a false signal.” No kidding. But that didn’t keep hundreds of news outlets from trumpeting the Omen’s omen of the potential end of civilization.

I noticed that these same news outlets didn’t give nearly the space to the Omen’s failed prediction of disaster. It’s not news when there’s no disaster, right? No, it’s not. And the fact is, there are zillions of correlations in the data out there that data miners are, even today, doing their best to hunt up. There’s the Miniskirt Indicator, the Super Bowl Indicator and the Hammer, to name just a few. None of them mean anything. (Or maybe they do … Ooooooo-eeeeeee-ooooooo.)

OK, fine. All in good fun. It’s Halloween, after all. And the goofiness doesn’t hurt anyone, does it? Well, maybe it does. For example, on August 13 (Friday the 13th), while the Internet was abuzz with talk of the Omen and impending doom, The WSJ reported that Omen inventor Jim Miekka himself had exited the market. “I would’ve probably stayed in until the beginning of September,” he said. “That was my basic plan, until the Hindenburg came along.”

Too bad for him – and for those who took the Omen seriously. This September turned out to be the best one since 1939 for stocks, up almost 9%. Small-cap stocks scared up some good returns as well, up 12.5%.

Certainly there are so many predictions out there that one of them eventually will come true. After all, the Hindenburg Omen had successfully predicted every market crash since 1987. It just didn’t predict this … non-crash. And on the rare occasions that market omens like the Hindenburg hit, it’s sheer chance. Omens that don’t hit go by unnoticed, like a train in the night. The only way this kind of train will hit your portfolio is if you take any action based on it.

Don’t be spooked by short-term market-timing tactics. Stay fearlessly invested at all times, globally diversified in low-cost holdings according to your own financial goals. Any other strategy is a scary way to invest your life savings.

About the author

Tom Posey, CFP®, J.D., AAMS

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