3 Stock Market Superstitions That Indicate We’re Headed for a Crash

Posted in Investments • September 25, 2013

Because the stock market is full of numbers, it might appear to be driven by logic and cold facts. However, markets are composed of humans — and as we’re largely emotional creatures, the movements of individual investments and entire markets are influenced by emotions.

These emotions include what we’ll loosely term superstitions and omens. Sometimes, stock market traders and others notice trends in the market and develop “indicators” to describe these trends. And as 24/7 Wall St. recently pointed out, “There always has been a long line of doom-and-gloom prognosticators willing to sell and market Armageddon” as well.

Some (such as the Hindenburg Omen) are based on relevant data and might have some meaning, even if some traders read more into them than is likely warranted. Others (such as the Super Bowl Indicator) are purely fumbled attempts to assign meaning where there is none.

Football season is warming up, we’re in a period following a string of Hindenburg Omen warnings and October is fast approaching — it’s time to look at the three stock market superstitions currently in vogue.

1. The October Crash Theory

october crash theory

There have been three major stock market crashes in the last century, starting with the 1929 crash, which ushered in the Great Depression. The other two occurred in 1987 and 2008; the 2008 drop was due to the financial crisis, which led to the Great Recession.

Also, all occurred in October.

Coincidence? This is likely the main explanation. After all, there have only been three crashes, so we’re not talking a large data sample.

There’s all kinds of speculation as to why October is the bewitching month for the stock market. I think there could be a kernel of truth in the self-fulfilling prophecy explanation for the second two crashes. After the “Big One” occurred in October 1929, some stock market traders and other market participants might have started getting a bit skittish in October.

I also think the seasonal effect on moods could be partially at play. Many people feel more energetic and “up” as the days get longer from winter to their peak in June. The livin’ is easier in the summer, as per the song. By October, “real life” — more serious life — has set back in.

Takeaway:  I’d pay this one some heed, but not too much.

Photo credit: Franklin D. Roosevelt Presidential Library and Museum

2. The Super Bowl Indicator

super bowl indicator

This indicator is said to predict whether the stock market will rise or fall for the year based on which NFL conference produces the winner of the Super Bowl. If the winner hails from the National Football Conference, the indicator predicts the market will rise. If the winner comes from the American Football Conference, the indicator predicts the market will fall.

The indicator reportedly has about a 75 percent success rate, with some discrepancy based on a few teams switching leagues over the years. From 1967 to 1997, the indicator held true 28 of the 31 seasons, according to The Wall Street Journal.

This indicator isn’t based on any relevant stock market data, which makes it suspect to start. Just because there’s a correlation between these two unrelated events, doesn’t mean one causes the other. Additionally, it’s easy to find “trends” or factors that cause the stock market to fall when searching for them retroactively.

Takeaway:  This one makes for fun press, but it shouldn’t be given any credence.

Photo credit: PDA.PHOTO

Related: Super Bowl Commercials: Clues to Your Next Stock Picks?

3. The Hindenburg Omen

the hindenburg omen

This one received a spate of press in August as it flashed “on” numerous times.

As the name suggests, this technical analysis pattern is said to predict a coming stock market crash. The infamous “Hindenburg” was the German airship that crashed in New Jersey during a transatlantic flight in 1937.

This omen occurs when four related indicators appear on the same day:

 

  • The daily number of New York Stock Exchange 52-week highs and the daily number of new 52-week lows are both greater than or equal to 2.8 percent (about 84 stocks) of the sum of the NYSE issues that advance or decline that day.
  • The NYSE index is greater in value than it was 50 trading days ago.
  • The McClellan Oscillator is negative. (This indicator measures the rate of money entering or leaving the stock market.)
  • The number of issues hitting new 52-week highs cannot be more than twice the number of new 52-week lows.

Every major crash or downturn in the stock market in the last 25 years has been preceded by this omen. The timing has varied, though, from the downturn occurring from one day to a few months after the omen flashed “crash ahead!”

However, the omen also produces many “false positives” — a downturn or crash has only occurred about 25 percent of the time the omen was predicting gloom and doom.

Takeaway:  I’d pay this one some heed, but not too much.

Photo credit: US NAVY

 

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