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3 Market Predictors You’re Better Off Ignoring

The persistent appeal of market myths.

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.

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Some believe the technical analysis pattern indicates market uncertainty and the likelihood of a crash.

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.”

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Low trading volume on the S&amp;P 500 may not spell trouble.

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.

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When the S&amp;P 500 moves out of bear territory and hits its prior peak, some fear this could signal a downturn.

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.

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Here&#039;s what you can do next.

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.

 

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Important Disclosures

The information presented does not consider your particular investment objectives or financial situation (including taxes), and does not make personalized recommendations. Any opinions expressed herein are subject to change without notice.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

The NYSE Composite Index is designed to measure the performance of all common stocks listed on the NYSE, including ADRs, REITs and tracking stocks. The index is weighted using free-float market capitalization and calculated on both price and total return basis.

The S&P 500® is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.

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