to HomeThe Hindenburg Omen...and why it's worth pondering.
As the summer days were coming to a close, the August swoon on Wall Street gave rise to the latest manifestation (though some quibble with the technicalities) of the so-called Hindenburg Omen.
Depending on who you talk to, this phenomenon has anywhere from a 25 to a 50% accuracy rating in presaging a major stock market decline of at least 10%. It manifests itself primarily when the daily number of new highs recorded on the New York Stock Exchange and the daily number of new lows are greater than 2.2% of the total number of issues traded. There are some other indicators that play a part in this complex indicator put together by an obscure market pundit named James Miekka, who ate his own cooking by deciding to sell his stock portfolio in mid-August after twice seeing the elements of the Hindenburg Omen line up. (Miekka, who is blind due to an accident in his home years ago, reportedly dictates a tome called the Sudbury Bull and Bear Report, which is then e-mailed to his followers.)
There are two points we wish to make about the Hindenburg Omen.
1. The whole point of the indicator is to show a confused market, such as we've had for several months. It's odd to have a significant number of stocks hitting new highs and lows simultaneously; indeed, it reveals that there is a marked and potentially volatile divergence of opinion among traders as to where the overall market is heading.
2. This or any measure of market sentiment or signal of a possible turning point must be paid especially close attention to now. The reason for that is just who is making the decisions each day as to where stocks are headed.
TODAY'S MARKET PARTICIPANTS
Call it the inmates running the asylum...the tail wagging the market dog (or actually being mistaken for the whole dog itself.) However you want to term it, stocks' direction is controlled almost exclusively now by a relative handful of traders. They--the increasingly scorned high-frequency traders and others--have stepped into a vacuum of sorts that has been left by the "core" investors of Wall Street having largely abandoned investing. We speak here of average Americans; people who used to view buying and holding stocks as taking part in the American Dream and planning for retirement, but who now don't quite know what Wall Street is all about.
Some of you have read of the early days of your Editor's experiences with the investment markets; whether in Understanding the Game or elsewhere. In those days, the average person invested in stocks, as did the average professional (i.e.--broker or mutual fund portfolio manager) because those stocks represented companies. All of us pored over financial statements, annual reports and the like. We took an interest in new technologies, and looked for those companies on the cutting edge of bringing them to the masses. We looked for those companies that met our needs better and more profitably than their peers.
We looked up to solid, established sober investing leaders: Philip Caret, Sir John Templeton and, later, Peter Lynch. Lynch was arguably the last "giant" of the fund industry whose prowess (albeit at an especially opportune juncture in market history) truly benefitted the average long-term investor.
Those days and that kind of market are gone. Caret, Templeton, Lynch and great men and women like them have been replaced by an assortment of confusing speculators, carnival barkers and shriekers on financial television. Instead of teaching how to soberly evaluate companies, the average guru today is more interested in showing you how to shave a fraction of a penny off of a high-frequency trade; the company in question matters little, if at all.
We need to worry about the Hindenburg Omen--and more--because these are the sorts who populate the day's trading on Wall Street now; and have to a great degree forced out the sober investor of years past. Back "in the day," such speculative activity occurred only at the margins. The overwhelming majority of activity on Wall Street was that of investing. Now, the great majority of daily volume is owed to this relative handful of folks who have little mooring in fundamentals or common sense, but have come up with increasingly complex ways to use a little money to move markets, at times, significantly (we'll talk more about the actual mechanics of this soon.)
This is Wall Street's Achilles' Heel. After all, when the traditional support for stocks from traditional investors has been so compromised, there is little support for the market if, suddenly, enough of these modern-day gamblers gets the willies and decides to sell. We saw this in the May 6 "Flash Crash." We will inevitably see such a freefall repeated.
Our hope is it's repeated enough, and does such far greater harm to both the markets and economy, that regulators down the road--egged on by the masses wanting heads to really roll--will give us back the more honest stock market of decades past.