Hindenburg Omen

September 25, 2013

Over the past few weeks, you may have heard financial pundits and analysts referring to the “Hindenburg Omen.” As you likely know, the ill-fated Hindenburg zeppelin took about half a minute to burn and come crashing to the ground, so it’s clear what this market signal used by technical analysts is supposed to magically foretell. Believers of this market signal suggest that the market is going to crash within the next 30 days.

Wealth Enhancement Advisory Services does not believe this market signal has any actual predictive power in and of itself. Studies that have been done on the validity of this “omen” are plagued with data mining and small sample size issues, both of which undermine any conclusions. Nevertheless, we think it’s important that you understand the basis of what the financial news outlets are discussing.

What exactly is the Hindenburg Omen?

According to believers, this market omen is supposed to be followed by a market crash within approximately 30 days of the trigger. A trigger occurs when the following four events occur on the same day:

  1. The daily number of NYSE new 52-week highs and lows are both greater than 2.8% of the sum of NYSE issues that advance or decline that day,
  2. The NYSE index is greater in value than it was 50 trading days ago,
  3. The McClellan Oscillator is negative, and
  4. The number of new 52-week highs cannot be more than twice the number of new 52-week lows.

 Why should I be skeptical of this so-called omen?

If you are wondering how this seemingly random set of criteria can predict a market crash, it probably can’t. The fact of the matter is, proponents of the Hindenburg Omen that cite its historical reliability tend to ignore some important issues:

  1. The omen tends to have many false positives. Even though there has been a Hindenburg Omen before every market crash, there have been many Hindenburg Omens that have not been followed by a market crash. You’d miss out on a lot of market upside if you sold after every omen trigger.
  2. Since there have been only a handful of market crashes in the past century, small sample size bias is a huge issue with the research.
  3. The existence of the Hindenburg Omen is probably the result of data mining. In other words, researchers dug through piles and piles of data until they finally found a set of criteria that has been true prior to every market crash. But even though the set of criteria has been true, it doesn’t mean the criteria has any actual predictive power.

So what should you do? Keep your wits about you. The media thrives on eye-catching headlines, and it doesn’t get any better than “Hindenburg Omen Predicts Market Crash”. Could the market crash in the next 30 days? Sure, but it could crash over any 30 day period. There is no evidence that the Hindenburg Omen has any true ability to predict a crash. Our goal is to create effectively diversified portfolios that seek to minimize losses were such an event to occur – and seek to deliver higher potential returns if it doesn’t.

 

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Fiduciary responsibility vs. suitability: Is your advisor acting in your best interests?

September 12, 2013

If you’ve been paying attention to the financial headlines lately, you’ve probably noticed that quite a few of them have been dedicated to the Dodd-Frank legislation of 2010, which contained several action items intended to “clean up” the financial services industry. Three years later, one item in particular is making headlines: a statement that authorized the SEC to establish a rule requiring securities brokers to act as fiduciaries.

What does that mean for you?

Well, if your money is currently managed by a brokerage firm, it potentially means a lot. Right now, brokers generally are not held to a fiduciary standard, meaning they generally don’t have a legal obligation to act in your best interests. They are required by law to make recommendations that are suitable for your needs. This means that certain brokerage firms can sell you proprietary products and/or other products they stand to benefit from the sale of.

To be clear: This doesn’t mean that proprietary products are bad; it simply means that you have the right to question why your advisor is suggesting a particular product. If s/he stands to gain from its sale, you may want to do your own due diligence and investigate whether this is truly the best option for your personal retirement goals.

Registered Investment Advisors (RIAs or RIA firms), which is the heading that Wealth Enhancement Advisory Services falls under, are required by law to act in a fiduciary capacity. This means that we legally must act in our clients’ best interests at all times when making financial recommendations.

So, you may be asking, why would anyone NOT want to work with someone who is legally required to work in their best interests?

Where people usually decide whether or not to use a fiduciary versus someone a non-fiduciary revolves around cost and the future of their relationship. Generally speaking, fiduciaries charge a fee and non-fiduciary advisors charge a commission. The fees charged by an RIA, for example, might be higher than the commissions one comes across with a broker.

And maybe that’s OK with you – maybe you’re not looking for a long-term partnership with an advisor that gives you continuous advice; maybe you just want some one-off advice for one particular move. In that case, it may be more reasonable to go with a broker. Either model may be right for you, based on your investment objectives.

The U.S. Department of Labor is already weighing on what they think should be done: Jason Zweig of The Wall Street Journal reported on August 9, 2013 that “as early as October, the U.S. Department of Labor is expected to propose new rules that would ensure that brokers and other securities professionals would act solely for the benefit of their clients when advising on individual retirement accounts (IRAs).”

How this impacts you, the consumer, remains to be seen. If the SEC ends up establishing a fiduciary standard for brokers, there could be major changes ahead for the financial services industry.

Nothing changes for the RIAs, though. We’re still held to the same high standard we’ve been upholding for years at Wealth Enhancement Group. Through our fiduciary responsibility to our clients, you can be sure that when you work with us, your advisor is consistently giving you advice that’s objective, unbiased and always in your best interest.