Dear Mr. Berko:
Please tell me how this Hindenburg Omen stock market predictor works. My broker now follows this market indicator and wants me to liquidate my entire (large) portfolio. He told me that the Hindenburg Omen has predicted every downturn since 1987 and that it now indicated the Dow Jones will fall to the 4,000 level. I’ve never heard of this, but my broker is adamant about its accuracy, and adamant that I turn everything I have into cash or the equivalent. Please advise me, as I have owned many of my stocks – mostly blue chips and utilities – more than 30 years through thick and thin.
D.B., Vancouver, Wash.
Dear D.B.:
If trepanning doesn’t work, then your broker must consider a frontal lobotomy. I’m confident that over the next 30 years, through thick and thin, your stocks will survive just as well in the future as they have in the past.
The Hindenburg Omen is named after the German dirigible – an 804-foot blimp stuffed with 7 million cubic feet of hydrogen – that crashed at the Lakehurst Naval Air Station in New Jersey in May of 1937.
And while I think the market could head 15 percent to 20 percent lower, I’m certain as gravity that it will not fall to the 4,000 level – unless the Dow splits two-for-one.
The Hindenburg Omen (Titanic is a better name) uses the following indicators to predict a market crash. (1) The number of new 52-week highs and the number of new 52-week lows on the New York Stock Exchange must be greater than 2.2 percent of issues traded that day. (2) The smaller of the number of 52 weekly highs and lows must be greater than or equal to 69, which is 2.2 percent of 3126, or the number of issues that trade on the NYSE. This isn’t a rule, but more like a checksum and is a function of the 2.2 percent of the total issues traded. (3) The 10-week cumulative moving average of the Dow Jones Industrials must be rising. (4) The McClellan Oscillator (the difference between the number of declining and advancing issues on the NYSE) has to be negative and (5) new 52-week highs must be less than twice the number of new 52-week lows. And when all these indicators are in sync during a specific market day, the Hindenburg Omen is supposed to presage a significant market downturn.
Frankly, I think the Hindenburg Omen is a barrel of tommyrot. It seems that all these weird theories come out of the woodwork after the market has nose-dived, not before. Yes, I know it presaged the market crash of 1987; however, the Hindenburg Omen projected six false positives since then, and every one of those devotees who acted accordingly did not fare very well. Ask yourself, why didn’t the Hindenburg Omen signal a market crash in 2007 when the Dow Jones was trading at 14,000, which was the most nearly perfect time to exit the market?
I’m not going to advise you to liquidate based upon those arcane fractals. But I do think the Dow could move lower by 10 percent to 15 percent, and your broker’s advice to “sell everything” (depending on your portfolio’s “beta”) could be industrial-strength dumb.
However, you might consider culling your portfolio to eliminate your potential cats and dogs, and raise some cash. Cash gives you time to think.
This is also an opportunity to revisit your portfolio and examine each of your issues with the intensity of a jeweler’s loop look. You may find that some of your issues are not timely in this market, such as capital goods, home furnishings, banks, lodging, etc., as they were a few years back. And as Colorado’s ex-U.S. Sen. Ben Nighthorse Campbell once said: “Timing is key to the success of a rain dance.”
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
© 2010 Creators Syndicate Inc.
