Market Timing has a bad reputation and in many cases deservedly so. Claims of exaggerated returns are all over the web, magazines, TV, newspapers and direct mail.
But don’t kid yourself. Every investor and mutual fund is timing the market, timing stock purchases and sales, adjusting their asset allocation to improve performance. It is all about timing the market. Buy and Hold is dead. If you only buy and never sell, what do you call that strategy? There is a time to own a stock or index and a time to be short or out.
Many philosophies want to make you feel that you cannot time the markets or time stocks. If your definition of timing the markets is that you know what the markets are going to do the next day, then no one can provide that information. If your definition of market timing is to use either fundamental or technical analysis to outperform Buy and Hold, many approaches may be able to do that.
Past performance is no guarantee of future results. This applies to individual analysts using fundamental factors or the market technicians using a systematic trading plan. The key to beating the market averages is having a trading plan that can work in all kinds of markets. It doesn’t matter if you are tracking earnings or trends. Factors will change and it is that change that causes one to take action. The key is to have evidence that the actions taken have some basis of performance over a long period of time.
Beware of short term results – show me 10 years of performance in various market cycles, not the last 2 years of a boom and bust market. I saw a site selling systems using 500 days or less of data.
Beware of single system Market Timing Plans for all stocks, indexes, and futures. Do you really think there is one trading system that is great for Google, (GOOG), the S&P 500,(SPY) and China, (FXI), pork bellies, Gold and Oil futures. Run from the “Holy Grail” trading systems.
Beware of results using double or triple index performance – show me the performance for the S&P 500, Gold, or Real Estate index over 5-10 years using the base index, not 3X ETF’s.
Beware of systems of low priced stocks or options with huge percentage gain claims. An option that goes from $.50 to $1.00 has a 100% gain. You don’t even know if you could have bought it for $.50 or sold it for a $1.00 with option spreads on thinly traded stocks.
Beware of low volume stock market research and trading claims. How many shares could you have actually bought on a stock with little volume?
Beware of trading systems and performance based on a previous day’s close. Even stock analysts base their performance on the close the night before an earnings miss. That is why they all downgrade it after the announcement. They get to use the previous nights close. That doesn’t help you! Look for a system that issues a signal end of day and is based on the next day’s open or close.
Market Timing some assets are hard from a fundamental or technical approach. Don’t trade them! There are enough indexes and asset classes to trade that have characteristics providing traders and investors better Market Timing prospects than others. Market Timing Biotech stocks can be a risky proposition.
Beware of bad Market Timing. Market Timing takes research and discipline. Research takes time and careful analysis. Discipline is probably the prime factor in Market Timing success. There is “No Holy Grail”. Market Timing research or technical trading plans will have periods of underperformance. You must have discipline to follow the rules long term. Short term, anything can affect analysis. Not a Buy and Hold approach, but a long term view on the research or trading system approach.
Beware of curve fitting in research or trading plans. A few good calls on a stock or index are not Market Timing. Beware of trading systems that are not always in the market on broad indexes like the S&P 500. Most of us are trying to Market Time by being long or short to make money in all kinds of markets.
Beware of Long only trading plans or systems.
Beware of vague trading plans with no specific entry or exit rules, like “Don’t fight the Fed”, “Buy when money is easy”, or “Buy when overbought”.
Beware of Bullish or Bearish type calls. Market Timing is about specific Buy points and Sell points. Too many Market Timers would have you broke before their eventual calls may seem to come true. I know of one Market Timer who has been bearish for the last 10 years and did not change or take any profits during the 2008 collapse.
Beware of fundamental or technical models that are not flexible to changing regulatory and governmental actions.
Market Timing is always here. Research and discipline are essential. I feel that regulators and financial professionals agree that if you do not have the talent, Buy and Hold may be better than poor market timing. Mutual fund money flow reports show that the average investor has a poor track record and “buys high” and “sells low”. It is not easy to Buy when no one wants them, and sell when everyone wants them.
For more on market timing, contact mark@seleznovcapitaladvisors.com
