This glossary of financial terms is inspired by Ambrose Bierce’s masterpiece The Devil’s Dictionary, which the great American satirist published sporadically between 1881 and 1906. (View free versions of Bierce’s text here or here.) Like Bierce’s brilliantly cynical definitions, the explanations presented here should not — quite — be taken as literally true. Some of these entries are adapted from articles published previously in Financial History, Money, and The Wall Street Journal.

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HAWK, n.  A central banker who believes that an economy that hasn’t responded to anything else the central bank has done will respond when it raises interest rates. (See DOVE.)

 

HEAD AND SHOULDERS, n.  A purported pattern in TECHNICAL ANALYSIS in which the price of a stock or other asset bounces up a little, down a little, up a lot, down a lot, up a little, then down a little — which is supposed to mean a lot about how the price will move in the future. If that reminds you of the lyrics to the children’s song,

Eyes and ears and mouth and nose,

Head, shoulders, knees and toes, knees and toes,

you might well be right, but you have no future as a technical analyst.

 

HEMLINE THEORY, n.  The belief that stock prices rise when the hemlines of women’s dresses go up and fall when hemlines lengthen — purportedly driven by a tendency of skirts to rise in times of national economic optimism. The theory proves that 1) Wall Street’s traders have always tended to be men with only two things on their minds (money is one) and 2) Wall Street has always loved spurious correlations, or variables that appear to move together even if randomness is the only plausible explanation.

If the theory is correct, then short skirts mean you should go LONG on stocks; long skirts mean you should go SHORT on stocks. Hemlines, the theory says, were long in the 1930s and 1940s, when stocks also fell toward the floor; hemlines were short in the 1920s, when flappers ruled fashion and bulls ruled the stock market. And hot pants were all the rage in 1971, when stocks gained 14.3% in the U.S.  But the mini skirt was popular in the mid-1960s, when stocks bounced all over the place. And maxi skirts came back in vogue in 2010, just in time for a roaring bull market. The theory, whose origins are uncertain, unravels if you try to account for stock-market returns in the 19th century, when hemlines never rose above the ankle. And if you want to end up in stitches, just contemplate using the theory to explain stock markets like Dubai or Kuwait, where prices are wildly volatile even though women’s hemlines haven’t budged in centuries.

In short, as Burton Malkiel wrote in his classic book A Random Walk Down Wall Street, “don’t be too optimistic about expecting the hemline indicator to give you a leg up on market timing.”

 

 

HINDENBURG OMEN, n.  An indicator in TECHNICAL ANALYSIS that purportedly predicts a market crash. It is calculated by establishing whether the daily number of new 52-week highs is no more than twice the daily number of new 52-week lows, then determining that the daily number of new 52-week highs and the daily number of 52-week lows is each at least 2.5% (or 2.8% or 2.2%, depending on whom you ask) of the total number of stocks that either go up or down, if and only if 1) stocks overall are higher than they were 10 weeks ago and 2) the exponential moving average of the daily ordinal difference of advances minus declines over the past 19 trading days is less than the exponential moving average of the daily ordinal difference of advances minus declines over the past 39 trading days.

If you were able to read that in one breath, you are qualified to become either a pearl diver or one of those people who read the disclaimers in automobile commercials on the radio.

The Hindenburg omen has predicted approximately 538 of the past three market crashes. For some peculiar reason, it is named after a gas-filled blimp that exploded and burned in 1937.

 

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