 | The Hindenburg Omen – A Really Bad Case of Economic Hypochondria |
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We have argued that many people are afflicted with Economic Hypochondria. This disease causes a person to think the worst about everything and anything that happens. Remember Dubai? Well, nobody talks about it anymore. The oil spill? The computer generated apocalypse never happened. In fact, some people seem angry that huge slicks of oil can't be found.
Every day brings new things to worry about. Earlier this year, CNBC was reporting that the decline in copper prices was a signal of a double dip. Now, with copper prices up 14% in the past month, a CNBC host says, "I don't get it...we keep hearing that the economy is weak, but copper prices are up." Good news is "puzzling" to the pouting pundits of pessimism, while bad news is considered the "real deal." That's what Economic Hypochondria is all about.
In the most severe cases of Hypochondria, people come to believe they have some strange and rare and deadly disease. When it comes to economics, this severe case can be found in a belief in the "Hindenburg Omen." This is a strange technical analysis pattern that supposedly portends a market crash. When we first read about it, we thought this was a fictitious idea, made up by some behind the scenes and secretive Madison Avenue marketing firm that was hired by a short-seller.
But, a perusal of the Internet shows that this Hindenburg Omen has apparently been around for awhile and is based on Norman G. Fosback's High Low Logic Index. Evidently, it requires at least 2.2% of the market's stocks to hit a new annual high at the same time at least 2.2% hit a new annual low, while the MaClellan Oscillator falls and the markets 10-week moving average is rising. And, remember, the number of new highs cannot be more than twice the new lows.
Supposedly, this Hindenburg Omen has predicted every market crash since 1985. Unfortunately, it has also issued many false signals (see John Lee's extensive analysis here). It also seems to be a severe case of backfitting. Some things appear to work for awhile and then just don't anymore because they were just coincidence. This is like saying the Major League Baseball team with the most ex-Chicago Cubs on the roster always loses the World Series. This was true until 2001, but is no longer. However, it fits the bias of many baseball fans – the Cubs are cursed. Despite all of this, one of the TV hosts afflicted with the worst case of Economic Hypochondria, Glenn Beck of Fox, decided to highlight the Hindenburg Omen on his show late last week. For the record, I like Glenn Beck. I like the bootstrap story of his life. I like his near daily disscusion of the spiritual side of life. I like his conservative world view.
But, when it comes to the economy, he seems willing to grab onto anything that is negative. We agree with Mr. Beck that government is growing and that this hurts the economy. But, this does not mean that the earth will be scorched and the economy will not grow. It does not mean that you should buy gold and head for the hills. Just because you dislike the party or person in power does not mean that the economy will tank. The Hindenburg Omen is a bunch of mumbo-jumbo malarkey. I'm sorry Glenn Beck fell for it. But, that's what happens with Economic Hypochondria.
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