Friday, August 20, 2010

Fasten Your Seat Belts

The entire financial and business world has now learned the two most important words:  Hindenburg Omen (HO).  We have written about this indicator extensively, with trading floors, chat rooms and even the mainstream press doing articles.  Until now, the confirmation of the indicator has been in dispute.  That will now change.

In today's trading, which is also a triple witching day, the confirmation is now a done deal.  Ironically, this is quite possibly the last time this indicator will be useful or viable.  However, if you choose to ignore it, well then be prepared to take a major hit to your financial fortunes.

Prominent wall street analysts such as Joseph Battapaglia, have derided this indicator.  Of course, Mr. Battapaglia is well know for beating the internet drum all the way to the top and then to the bottom of the crash in technology stocks.  With all due respect Joe, haven't you learned your lesson?

Mr. Battapaglia is hardly alone in his disgust.  In fact, the major brokerage houses rarely, if ever issue sell recommendations.  Abby Joseph Cohen, a perma-bull if there ever was one, never met a stock or market she didn't like.  Never has thought that any financial asset was overvalued.  Dear Abby, perhaps you should write an advice column?  Naw, it's been done.  Never mind!

Now that the HO has made the Wall Street Journal, CNBC, The Drudge Report, Huffington Post and Wikipedia, it will become too well known to be useful ever again.  That's how technical analysis works.  The minute everyone knows is the very moment that no one can benefit. 

For investors, the key here is survival.  Safety can be found in very few places:  Gold, the Greenback, high quality bonds, high quality utilities and oil companies.  But, it would be far more prudent to let this impending waterfall decline fully express itself.  There ought to FAR better entry points.

In the case of Gold, for example, consider the likelihood that the mega hedge funds are probably being hit with margin calls and will need to sell the only liquid assets they have.  Thus, it is imperative that position sizes be kept fairly small, temporarily. 

In addition, most people are long a variety of financial assets such as real estate and employment.  These, too, will affected.  If you're so inclined, a strategy of hedging your balance sheet is advisable.  My personal preference is to place some portion of your portfolio in inverse ETFs such as FAZ and TWM.  But, be aware that these are NOT for the feint of heart and will subject you to wild swings and increasing volatility.

Investors need to consider the emotional impact of watching their net asset values bounce around like a pinball machine.  No point in subjecting yourself to what is sure to be a tremendous amount of angst.

Marko's Take


  1. Marko,
    How low do you see gold going ? next week is expiration for gold/silver and the cartel always takes the price down without exception .this time gold might surprise us and not take much of a hit ,because the bullion banks suppression scheme is coming unglued do to the lack of physical gold out there.
    Even today with the dollar up over .50 , markets down gold is only down a few bucks. In the past with expiration's coming up and the dollar up big gold would of been killed.At least to me things are changing in the gold market, and the cartel's days are getting numbered.

  2. Hey RD!

    This is purely a guess, but I'm thinking $1000.

    The HUI, on the other hand could go to 250...


  3. Marko,
    gold to a $1000, that would be a drop of over $230 .I guess anything can happen, but that sure seems excessive. When do you see this happening , all the economic conditions seem to be in place for god/silver to go much higher .Both gold/silver held up over the summer, usually their weak season .Now we are approaching golds good season ,where we usually see a spike in the price. You used to have a favorable view of gold, just wondering what changed your mind, you now sound like that Nadler guy from kitco -who has been negative on gold since it was at $250.

  4. RD:

    Being a perma-bull is one way ticket to financial armageddon. As I said, it's a guess.

  5. Hi Marko, are you saying that the HO has manifested its confirmation within the 30 day time frame required from the early August manifestation?

  6. Are you saying that on Friday the 20th, HO confirmed its early Aug manifestation, as per the 30 time requirement?

  7. Hi Anons:

    There has been some question as to the confirmation of the HO. However, as of Friday's trading, yes, the Omen was absolutely confirmed.


  8. Hi Marko

    Thanks for the interesting article. It maybe obvious to you and some of the readers, but it’s not clear to me why a particular technical analysis would lose its usefulness when everyone knows about it. Is it because people will take certain corrective actions once they have learned about the result of the analysis, thus reverting the predicted outcome? Can we still use the analysis as a health indicator of the market?

    By the way, it seems like a Greek tragedy for the Hindenburg Omen to lose its purpose in life the very moment it has served for everyone… I hope it’s still useful somehow…

  9. @ada,

    The reason a measurement becomes ineffective is due to each person will be locally optimizing for him-/herself.

    As an example, take a work place. If the management argues that they want to measure the effectivity by looking at parameter X and pay bonuses according to parameter X - then of course all sane employees will try to optimize their work to maximize X. But this in turn means that the measurement is of less value to the company: most people do well on X and thus it can't be used to discriminate who is really the good and bad workers.

    In general, the problem is that if people know about the HO, they will individually act to protect their assets and take precautions whenever they do something. When all of the herd acts like this the accuracy of the HO dwindles (accuracy is the probability that a confirmed HO triggers a crash).

  10. @JLouis,

    Thanks for your explanation. Just some final comments….

    While HO may fail to predict a crash as the result of corrective actions from the herd, the fact that it gives investors warning and helps to prevent a crash is still a great thing. Any average investor who may lose their shirts in a crash should be happy with such a “red flag”.

    Regarding your work place example, if the parameter X directly affects the company’s net profit, it would be a great thing for ALL employees to optimize their work to maximize X, which in turns will maximize the net profit.


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