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Be cautious of low-observation statistics

Some recently published statistics suggest the markets may be in for a bad time of it. Take those figures with a grain of salt, though.

statistics

Last week there was some talk going around the markets about how the market had just experienced it’s second 10% correction in 6 months. A big deal was made of this because apparently such a thing has only happened on three occasions before. The first was in 1929. The second was in 2000. The third was in 2008.

Sounds pretty bad, right?

On the face of it, sure. Those are years noteworthy with respect to bad market performance. Any time you start drawing comparisons between current events and things which happened in those periods it’s natural to get a big nervous.

A bit of caution is advised, though.

Three observations is statistically insignificant. You can’t really draw any reasonable conclusions from such a small sample. That perhaps becomes even more the case now that the “pattern” has been publicized.

For that reason, I wouldn’t rush out and go all-in on the short side.

By John

Author of The Essentials of Trading

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