8 Stock Market Omens That Influence Investors

Some have made much of the fact that three major stock market crashes–in 1929, 1987 and 2008–have occurred in October. Is there something about ghosts, pumpkins and cooler weather that triggers downturns? You never know, according to an interview with an economic professor at Washington University in St. Louis. Stephen Williamson, in a story in the Newsroom section of the school’s website, considers three possibilities: false correlation, something “fundamental about October that causes crashes” (like ripening pumpkins), and a pattern in which, perhaps, everyone expects a crash so it becomes a self-fulfilling prophecy. In the end though, Williamson says he’d put his money on the first idea.

5. The Death Cross

This omen at least has the virtue of being based on data as embodied in various market indexes and sector funds. In an AdvisorOne report on the Death Cross quoting MarketWatch columnist John Nyaradi last year, “The death cross forms when the 50 Day Moving Average crosses the 200 Day Moving Average in a downward trajectory.”

Another columnist for MarketWatch, Mark Hulbert, tested the theory this year by looking at the data. For more than a century, markets did turn down after a Death Cross. For the last 22 years, however, Hulbert found no correlation between the cross and the market’s behavior. He concludes that that the two moving averages don’t mean as much as they used to and so neither does the harbinger of doom.

6. The Golden Cross

As AdvisorOne reported in 2010, the optimistic omen of the Golden Cross, says Investopedia, is “a crossover involving a security’s short-term moving average … breaking above its long-term moving average … or resistance level.” The fact that a short-term moving average has topped the long-term moving averages says to some tech types that the market “has turned in favor of the stock.”

Like the Death Cross and the Hindenburg Omen, described on the next page, much media hype often seems to fizzle out. One theory holds that the hype itself changes investor behavior, thereby canceling the potential effect.

7. The Hindenburg Omen

This omen, as AdvisorOne has reported, comes in to play when five linked technical indicators make a joint appearance. Devised by mathematician Jim Miekka in 1995, it portends a stock market crash. In the last quarter century, every strong downturn has been preceded by the omen, although the time between the omen and a crash has varied from one day to four months. Miekka credits his colleague Kennedy Gammage with its doomsaying name; he came up with it when they realized that “Titanic” had already been used for another predictor.

It should be noted that not every Hindenburg Omen leads to a crash. In fact, a downturn only occurs about 25% of the time, according to research done by safehaven.com. The last such occurrence of the omen was in July. Those who follow the indicator are probably getting their portfolios ready for the drop.

8. The Presidential Election Effect

This theory holds that depending on which party wins the White House, bulls or bears will rule the day. Unfortunately, according to U.S. New & World Report, no on quite agrees which party favors the bulls. That being the case, it’s not too surprising that no one has produced definitive data to prove the case for one party or the other.

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