Market noise might be throwing investors

Stocks clawed back early losses Wednesday, with the Dow posting its best returns to start a quarter since 1938. Impressive, right? Traders might be tempted to think we’ve hit the low, and it’s all upside from here.

But before you get too excited, let’s have a frank discussion about market statistics.

Headlines that begin with “best” or “worst” are dominating financial media today, as they have many days this turbulent year. This is to be expected when volatility rears its head. The days with the best historical returns tend to cluster with the worst. It seems the market gods are simply flipping coins.

So how do you make sense of the markets without getting whiplash? The key is distinguishing true signals from all that noise. And while the public is laser-focused on price gyrations, most of those are just noise.

True signals appear rarely, and they can be tough to identify. Take the current price action. We started the week with a two-day gain, marking the first time the S&P 500 posted back-to-back gains of over 2.5% since the Global Financial Crisis in late 2008.

Back then, the big gains from the resulting bull market came substantially after a cluster of “signals” in 2008 — meaning this information may not have been that useful to investors trying to time the low.

First, there were two back-to-back 2.5% up days in September 2008 — fairly early on in that bear market. But buying that event was a clear loser, as the index immediately reversed strongly to the downside.

Then three sets of similar back-to-back gains came in late November and early December. Conceivably, these were close enough to the low that they may have been useful to longer-term traders. But had investors bought right after those gains, they wouldn’t have made money until about five months later — an eternity to shorter-term “punters.”

Traveling back through market history even further, we see two instances of this 2.5% two-day thrust signal in the wake of the dot-com bubble bursting in 2000. One instance came near the all-time high in April 2000, and the other caught the price bottom perfectly in October of 2002 — two years later.

Let’s get back to the fourth quarter of 2022. We’re all waiting for the inflation data to cool so the Fed can stop raising rates. That certainty might calm the markets, leading the way for them to steadily rise again. When a clearer picture emerges, we’ll all need cash to buy what many view as a generational opportunity to get stocks on the cheap.

You might be buying now. And that’s just fine if you’re investing according to a predefined investing or trading plan. But the riskiest action we can take is to get caught up in the headlines and burn through our liquidity before this bear finally decides to hibernate.

Writes /FinanceYahoo/

Reports /TrainViral/