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Whatever Happened to the Hindenburg ?

September was an excellent month for US stock market returns – the S&P 500 index was up 9.92% – the best September since 1939. October hasn’t been too bad either, with the S&P up over 3% for the month-to-date. Small company stocks have fared even better. We are constantly telling you not to focus on the short-term performance of the market, so why am I bringing it up now?

Well, based on the Hindenburg Omen we were supposed to experience a “market meltdown” in the month of September.

Jim Miekka, the author of a stock market newsletter, created a technical indicator he calls the “Hindenburg Omen.” It combines various technical indicators tracking moving averages and the number of issues setting new fifty-two-week highs and lows. The Omen allegedly flashed a “sell” signal on August 12th, and the internet was buzzing on Friday the 13th about the looming disaster in the stock market. We received a few phone calls and emails from clients who had been alerted to the warning by friends, and wondered if they should be concerned. Obviously, people are still shaken by the market events of 2007 and 2008. If they had followed Mr. Miekka’s advice, and sold out of their US funds on August 13, they would have missed 9% plus gains in their large US company funds and over 15% in their small company funds as of Friday, October 22nd. Now they would be worrying about when they should get back in.

There are hundreds of stock market trading models and many more newsletters that sell advice to investors, but none have been consistently successful. Professor Eugene Fama of the University of Chicago, and one of the earliest advisors to the DFA funds, learned this early in his career. One of his first jobs was to conduct research on timing indicators for the publisher of a market newsletter. As a statistics whiz, he had no trouble coming up with technical signals that did very well in predicting market moves. Unfortunately for fans of timing models, he also found that they only worked on past data, and none of them continued to work once he identified them.

Predictions based on models will be made every day. Some might even be right, but as the saying goes, even a stopped clock is right two times a day. Why is it that the newspapers and TV shows rarely revisit the predictions that were made to acknowledge whether they were right or not? Mr. Miekka, whatever happened to the Hindenburg?

Jeannette A. Jones, CPA, CFP®