In such tumultuous times—volatility in world markets, China’s economic slowdown, tightening Fed policy and looser monetary policies abroad—it’s natural to want an edge in predicting what the markets will do next. You may even be tempted to consider the many myths and superstitions that supposedly offer a way to divine the market’s course. And while seeking guidance from unrelated events like a Super Bowl win can be fun, there are other indicators that some investors turn to in earnest. Here’s a reality check on three popular “predictors” that don’t live up to their promise.
Definition: The Hindenburg Omen is named after the dirigible that famously went down in flames in 1937. Derived from a combination of factors, this phenomenon allegedly signals a market crash when the number of new 52-week highs and number of new 52-week lows on the New York Stock Exchange are both abnormally high.
Reality check: With its fairly frequent appearance, the omen is of very little practical use, says Jeffrey Kleintop, senior vice president and chief global investment strategist at Charles Schwab. “In contrast to the airship disaster for which it’s named, the omen has actually been triggered quite often—and most of the time has not been followed by a crash or a change in trend.”
Definition: Many investors expect a lower trading volume around major holidays. But when trading volume is down outside of a holiday period, some people fear that the low volume reflects investors’ lack of conviction—and may foreshadow a correction.
Reality check: “Low trading volume has not been a reason to avoid the stock market,” Jeff says. “In fact, high volume is usually associated with market losses.” Notice above that if you measured performance of the S&P 500® only on days when trading volume was lower than the 50-day average, you’d see the index rise nearly 300% since 2009. Surprisingly, if you measured only when trading volume was higher, you’d see about a 50% loss.
Definition: As the market climbs back from a bear market and reaches its last highest point before the crash (aka the prior peak), some believe the market becomes vulnerable to another big drop. The rationale: Once investors who were waiting to make back their losses finally reach that point, they’ll start to sell.
Reality check: Past stock markets have often continued to rise after reaching a prior peak, Jeff notes. As the table above shows, in four of the five bear market recoveries since 1982, the S&P 500® continued to rise during the three-month and 12-month periods after the index reached its prior peak.
Remember that the most important challenge you face in adjusting a portfolio after a long bull market—or any market—is not how to catch market highs or lows, but how to make sure the asset mix in your portfolio still matches your risk tolerance and goals. With a plan in place, you’ll be better prepared for whatever markets bring—and reading tea leaves won’t be necessary.