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Why You Can't Afford to Ignore the Hindenburg Omen

The Hindenburg Omen-a harbinger of stock market crashes-eerily appeared again last week...and the Dow Jones promptly dropped 205 points. But its appearance brought mostly scorn from the mainstream financial media.

Here are just a few of the headlines from the past week:

  • "Hindenburg Omen is Just Hot Air"
  • "Why 'Hindenburg Omen' Is Just a Superstition"
And our personal favorite:

  • "Hindenburg Omen is idiotic, and if you believe in it, you should lose your right to own stocks-or anything"
Several Wall Street analysts reacted as if even being asked about the Hindenburg Omen offended them.

"Let's not mince words on this subject: This is an example of the worst kind of 'technical analysis' - a market signal essentially designated for media sound bites," Adam Grimes, chief investment officer at Waverly Advisors., told The Wall Street Journal. "The markets may well decline from this point, but they will not do so because of some cleverly named signal. The Hindenburg Omen, we have to say, is mostly hot air."

Nonbelievers in the Hindenburg Omen say it correctly predicts a stock market crash only 25% of the time, and point out the last time it appeared, in 2010, the markets just kept on rising.

"In 2010 the accuracy of the 'Hindenburg Omen' indicator went up in flames and the current situation suggests the same result in 2013," huffed Daryl Guppy on the CNBC Web site.

Yet an appearance by the Hindenburg Omen has preceded every stock market crash but one since 1985, and if you look closely at the numbers this indicator's track record is remarkably accurate.

Maybe the doubters don't know as much as they think they do.

"They call it bogus because they don't understand it," said Money Morning Chief Investment Strategist Keith Fitz-Gerald, who called the Hindenburg Omen one of his favorite indicators.

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Margin Buying Surpasses 2007 Danger Levels - Is Another Market Crash Coming?

There's nothing like buying securities with money you don't have - or, more precisely, with borrowed money from your broker, with your investments as collateral.

It's called buying on margin, and it's soaring as the market continues its tear and speculative investors seek a piece of the action. As your stocks appreciate you can borrow even more. A market rally lets you expand your portfolio by piling on more debt.

But it's potentially dangerous and could portend a stock market crash.

As the accompanying chart shows, historically there has been a direct link between a surge in margin loans and corresponding stock market peaks - followed by sharp declines in the markets.



So it's no small matter of concern that the Financial Industry Regulatory Authority reports the amount owed on loans secured by investments climbed to a record high $384 billion at the end of April.

That topped the previous high - $381 billion in 2007, not coincidentally, just before the financial meltdown and the Great Recession.

As a percentage of the economy, the latest margin borrowing totaled 2.71% of gross domestic product.

By comparison, margin borrowing hit 2.73% of GDP in July 2007, during the housing bubble, and 2.81% in March 2000 during the tech bubble, which was followed by a stock market crash.

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