As scary as it sounds, the Hindenburg Omen has pretty much no bearing on the future trajectory of stocks. That’s why the market is shrugging off the latest sighting of this dubious technical indicator, and so should you.
After all, the Hindenburg Omen has been as successful at predicting market crashes as its namesake zeppelin was at not catching fire. Indeed, historically, the majority of times the market flashed a Hindenburg Omen, it didn’t pull back or enter a bear market, much less tumble.
Heck, as MarketWatch pointed out, the S&P 500 notched an all-time high close for the 33rd time this year this week, and yet the Hindenburg Omen has made a number of appearances over the last 12 months.
To be fair, the Hindenburg Omen doesn’t claim to predict a market crash. It only warns of one. And it is true that a Hindenburg Omen appeared before every significant market selloff of the last 30 years.
The problem is that most of the time the Hindenburg Omen leads to nothing. No, it’s not always a false positive, but its track record is bad enough that the indicator is essentially useless.
Proponents of the Hindenburg Omen liken it to the appearance of funnel clouds. Although the appearance of such weather doesn’t automatically mean you’re about to be flattened by a tornado, it’s still a good idea to head for the root cellar.
Maybe so — except that heading for safety in the stock market comes with significant costs. Moving from equities into bonds or cash racks up fees and commissions, and perhaps even taxable events.
Hindenburg Omen versus Fundamentals
Heck, even Tom McClellan of the McClellan Market Report isn’t worried about a market decline — and he’s the guy who made the call on the Hindenburg Omen late Tuesday. The newsletter writer told MarketWatch that this instance of the Hindenburg Omen is unlikely to precede a big selloff because the market is entering its strongest period of seasonality.
And how. December is tied for the best month of market performance. The S&P 500 has gained an average of 1.5% this month since 1929, according to Yardeni Research. Moreover, January is the third-best month for market performance, notching an average increase of 1.2%.
Additionally, as useful as technical analysis can be, the Hindenburg Omen flies in the face of market fundamentals. Although stocks are not cheap at this point in the bull market, neither are they so overpriced that they’re begging for a plunge.
With a trailing price-to-earnings ratio of 20, the S&P 500 may very well be overvalued, but it typically trades at higher multiples than that before a market crash. Besides, corporate earnings remain robust, the predicted collapse in margins hasn’t come to pass — at least not yet — revenue growth is accelerating and the labor market is getting better.
Finally, stocks have shrugged off geopolitical crises, recession in Japan and Europe, and slower-than-expected growth in China.
Hey, there’s always a bull and a bear case for any security or market. Still, investors would do well to keep the alleged Hindenburg Omen out of this debate.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
