Here’s Why You Should Ignore The “First Five Days” Market Indicator

Some errors just keep repeating themselves… much like the endless time loop in the classic Bill Murray film “Groundhog Day.”

Let’s do a little myth busting today – that savory task of uncovering indicators that just don’t indicate what they’re supposed to.

An indicator that gets lots of press early each year is the “First Five Days” indicator, which holds that the direction of the first five trading days of the year is a valid predictor of the direction of the market for the remainder of the year. Rest assured, it just doesn’t work.

Like Murray’s character, grouchy weatherman Phil Connors, who tries unsuccessfully to break the time loop by electrocuting himself and driving off a cliff — this myth just will not die.

The reason is simple: at the core of human nature is the desire to understand complex systems in simple terms. The problem is – we tend to apply this simplistic cause and effect model to very intricate problems and then expect similar “easy-to-understand” answers.

Interestingly, one good example of this human tendency to try to understand multifaceted issues with simple explanations is the Groundhog Day Weather Indicator. Like the financial markets, weather systems are complex and difficult to predict. But we have devised many simplistic ways to predict the weather, including the infamous Pennsylvania groundhog, Punxsutawney Phil. If he sees his shadow on February 2, the presumption is that there will be six more weeks of winter weather.

Because we like simple explanations, we are more than willing to believe cause-and-effect explanations that really don’t make any logical sense.

Maybe that’s why there are so many stock forecasting tools that use shaky logic and even shakier statistics to predict what will happen in the market in the days and months to come.

So let’s look at one of these hyped indicators that you’ll be hearing a lot about over the next week