The stock price of Walmart $WMT ( 0.0% ) has more than doubled over the past two years. And that might be a bad sign for the rest of us.

Recently, a Business Insider article argued that when Walmart outperforms companies that make luxury goods, the U.S. is likely to head into a recession. The logic is sound: Walmart sells staples at “everyday low prices,” while luxury companies do pretty much the opposite.

The article is mostly correct. However, it leaves out important context. There are three things we need to know before we can have confidence in the Walmart Indicator:

It’s that last one that tends to trip people up. Fortunately, we have the tools to deal with it.

Let’s deal with #1 - were we already heading into a recession before we read the Business Insider article?

Well, ask 100 people, and you’ll get 100 different answers, but the New York Fed has a model that suggests about a 19% probability of an incoming recession. Goldman Sachs recently estimated 25%. So, let’s just say it was 20%.

Okay, now for #2. The chart below isn’t exactly what the Business Insider article proposed, but it’s as close as we can get with readily available information. It shows the ratio of Walmart's stock price to Hermes' stock price. If the line is rising, then Walmart stock is outperforming Hermes. Which it has been.

The numbers show times when the ratio spiked, indicating that Walmart stock was significantly outpacing the luxury goods maker. Lo and behold, the ratio spiked before the U.S. headed into recession (the pink highlights) all three times.

But here’s the kicker, and it’s #3 in our list. How often did this indicator give a false positive? How often did it rise, suggesting a recession, but there was no recession ahead?

The answer is “quite often.” Of the eleven subjective rallies in the Walmart Indicator, only three preceded recessions.

Now we have the information we need to make a more informed decision.

Let’s head over to our Thinking Tools. The Belief Updater is a calculator that provides a sound way to update our thinking in light of new information.

From above, we know there was about a 20% chance the U.S. was heading into recession before we knew about the Walmart Indicator, so that’s what we use for the first slider.

The indicator has a good record at preceding recessions, but it’s not perfect. We could put the 2nd slider (its success rate) at 100%, but that’s being overly generous. Still, it’s high, so we’ll use 85%.

The key is the 3rd slider. The chart above shows a significant number of false signals, suggesting a recession when there isn’t one. Going back further, its error rate is around 55%.

The bottom line on the tool shows us how we might want to adjust our thinking. So, before we read the Business Insider article about the Walmart Indicator, we assumed there was a 20% chance of recession. Now, after considering the Walmart Indicator, the chance bumps up to about 28%.

If you didn’t know about false positives and how that should influence your thinking, you might read that article and assume there’s a 100% chance of recession. That could cause you to sell your stock holdings, raise cash, pull back on spending, or any number of behaviors that could be less than optimal if we are not, in fact, about to slide into recession.

The world is uncertain, and we’re constantly pulled back and forth based on new data. We’re developing tools to help you think through some of these issues and make more considerate and hopefully better decisions over time.