It’s the question everyone is asking – will this market ever stop going up? Will the momentum continue to move it forward, or are we in for a correction? Cheerleaders for the market bull run seem to believe that they have facts to back their belief in a rising market, but there are also signs that debunk those beliefs. Matt Allgeyer, Financial Planner at Wamhoff Financial Planning and Accounting, explains why these beliefs may not materialize, and provides advice to investors.
The Halloween Indicator
- The Halloween Indicator points to the trend in which the market typically grows between Halloween and May of the following year, but remains flat from May through Halloween.
- This year, however, the Dow has been up over 5% in the period of May through Halloween when it’s normally flat. Those who believe the market will continue to rise point to this growth as one of their reasons.
- However, there are no statistics to support the belief that the market will continue to move up in the next six months.
- A correlation review on the Dow since 1896 actually shows that when the market has this type of growth, it tends to be inverse the following six months, or a loss in the Dow.
September and October Indicators
- There is also belief in a continued bull run because the Dow never experiences growth in September and October in the same year. September and October of 2016 both saw growth in the Dow.
- September is typically one of the worst months of the year for the market, and more often negative than October. In years when September is up, October is down.
- Although it is rare for both September and October to see market growth (it’s only happened four times in the past 30 years), it does occur.
- However, there is no evidence to show that a bull run will continue when September and October have both been positive in the same year. In fact, historical statistical evidence has proven quite the opposite.
- For example, in 2007 (right before the great recession of 2007-2009), September and October were bullish in that year. So, this type of indicator doesn’t necessarily bode well for future market growth.
Keep your Emotions in Check
- While there may be signs that the market is prepared to take a turn back, try to avoid acting based on excitement, fear, or emotion.
- Contrary to the popular saying of “buy low and sell high,” many investors do exactly the opposite. During high times in the market, investors continue putting large sums of money into the market, and then pulling those sums out when it is low. Normally they are late to get into the market and late to get out.
- Another saying goes like this: “When others are putting money into the market, be wary and conservative, and when others are taking money out, be bullish and aggressive.”
Where do we go from here?
- Most believe that we can anticipate for the future based on what we’ve been taught by the past.
- In that case, many market fundamentals are telling us that the recent extreme highs can be an indicator of an overbought market, so pullback may be in our near future.
- Regardless, the key to managing the uncertain future and keeping your emotions in check is to have a plan and work that plan. Your plan should factor in various scenarios for market downturn, and your risk tolerance will help guide that.