Market Timing: Should You Attempt It?

» Jen_ - To Time or Not to Time

Should you try to ‘time’ the market?

Stock strategists are split on whether it pays to look for market cycles

By John W. Schoen
MSNBC

After a painful plunge on fears widespread bogus accounting and widening corporate scandals, the stock market is now surging — with the Dow leaping 1000 points in the last five sessions. Will the rally continue? Should you even try to pick the bottom? With adherents of “buy-and-hold” investing still wincing from the recent raging bear market, the idea of “market timing” is winning renewed attention.

CONVENTIONAL WISDOM on Wall Street holds that market timing is a fool’s game. Trying to move your money in the market before it rallies and out before it declines, according to this view, requires a crystal ball that just hasn’t been invented.

“The person who can tell you infallibly when we’re at the bottom or the top has not yet been born,” long-time market watcher Louis Rukeyser told his CNBC viewers Friday night. Still, just as “trees don’t grow to the sky,” he said, “submarines don’t dive to the center of the earth,” and many market watchers “think a bottoming process is now truly underway.”

In fact, after what turned out to be one of the biggest bubbles in the history of the U.S. financial markets, some market watchers think stocks are now hitting a bottom of historic proportions, including market strategist and historian Don Hays.

“The evidence is pretty overwhelming that the conditions you reached in the last 6 weeks have only been reached in a couple of time in U.S. history — 1932, 1974, 1982 — which were some of the best times in the U.S. markets,” he said.

Big Bear Markets

The stock market's recent slide is the one of the worst bear markets of the postwar era. Some notable bear markets of the past 60 years, including the crash of 1929:

 
Top      Bottom  Decline  Duration    Comment 
3/2000    ???     46.4%*   28 mo*  Recession began 3/2001 
8/1987   12/1987  33.5%     3 mo   Black Monday 
11/1980  8/1982   27.1%    21 mo   Recession began  7/1981 
1/1973  10/1974   48.2%    21 mo   Recession began 11/1973
 
11/1968  5/1970   36.1%    18 mo   Recession began  12/1969 
12/1961  6/1962   28.0%     6 mo
  
5/1946   6/1949   23.6%    37 mo   Recession began 11/1948 
9/1929   6/1932   86.1%    34 mo   Peak not regained til 1954 

* Through July 29,2002. All figures are based on Standard & Poor's indices.

Source: Global Financial Data, MSNBC research

That view helped propel Monday’s continued buying stampede, as investors sent the broader markets higher on fairly heavy volume.

During the Great Bull Market of the 80s and 90s, investors learned to simply “buy on the dips” and not worry about broader market cycles. Now, after a two-and-half-year slide has reintroduced the concept of a long-term bear market, market timing — the strategy of getting out at the “top” and back in at the “bottom” — is coming back into favor.

But it’s an investment strategy with only limited usefulness, according to Al Goldman at AG Edwards

“The only thing I think we can say with credibility we made a bottom,’ said Al Goldman. “Whether or not it was the bottom, nobody can answer.”

One of the biggest arguments against market timing is that mistakes can be costly. Though the Standard & Poor’s 500 index returned 13.26 percent over the past 10 years, if you missed the six best months in that period your return would have been only 8.29 percent, according to Barker French, Chief Investment Officer at Brinker Capital, a money management firm outside Philadelphia. Over the past 75 years, he says, the 62 best months returned about 11 percent per month; the remaining 838 months had an average monthly return of just 0.2 percent per month.

“Clearly timing doesn’t work,” he wrote in a recent note on the firms’ Web site.

But market timers say that argument has an important hole in it.

“What they fail to tell you is if you’re out of the market in, say, the 5 worst months, you did better, said Peter Eliades, editor of the Stock Market Cycles newsletter. “It’s a bad argument to use, but a lot of people fall for it.”

<img src="/files/mysites/jen14/dow65-83.gif" width=352 height=200 align="left"> The Dow Jones Industrial average topped near 1,000 five times before breaking through that milstone for good -- a process that took 16 years. (Data provided by CNBC on MSN Money)

Market timers like Eliades also note that “buy and hold” investing doesn’t work very well in a long-term bear market, like the period between 1966 and 1982, when the Dow topped out near 1,000 five times before breaking through that milestone for good. Given the scope of the recent market bubble, Eliades believes it could take a decade before the Dow sets new highs again.

“In 1929, when we topped out at 382 and came down to 40, we didn’t see the 380 level for another 25 years,” he said.

Despite the recent rally, few long-time market watchers are willing to predict that another long-term bull market has begun. And many gun-shy investors seem unlikely to believe them if they did. That has many investors ready to hit the “sell” button at the first signs that the current rally is running out of steam.

Some analysts also caution that stock prices may have to fall below their recent trough before another long-term bull market can begin. Eliades, who says he’s got his money in cash until the market shows clearer signs of its next move, is among the most pessimistic of that camp. He thinks the Dow could hit 3600 in the coming decade.

Even if you’re not that pessimistic, investment advisors suggest you still need to pay attention to the markets ups and down. Proponents of “buy and hold” investing say it never meant ignoring market conditions — you still need to be selling stocks that look overvalued and buying those that look cheap.

“You don’t put [stocks] in a safety deposit box and forget about them,” said Goldman.

And even money managers who say they don’t believe in market timing often use strategy know as asset allocation — periodically raising and lowering the portions of a portfolio invested in stocks, bonds and cash. To cycle-watchers like Eliades, that strategy sounds familiar.

“If you’re doing asset allocation between equities and cash, in effect what you’re doing is market timing,” he said.

and then there's this Dow chart from 7/19/02 WSJ....

<img src="/files/mysites/jen14/dow7400.gif" width=369 height=297>

<img src="http://pvcharts.quicken.com/bin/icenter...." width=470 height=250>
DJIA 5 YR Chart

.....Jen

-- posted by Jen_

» KLR - Protecting assets or missed chances?

He's betting the ranch big time and he had better be right or he is toast. Remember Jeff Vinik and Foster Freiss?....

Protecting assets or missed chances?

By Chuck Jaffe, CBS MarketWatch.com
Last Update: 12:01 AM ET March 2, 2003

BOSTON (CBS.MW) -- Art Bonnel doesn't know precisely what is in his mid-cap growth fund right now. He knows exactly what is NOT in it. Stocks.

In a move that has been the undoing of a number of managers in the past, Bonnel moved his Bonnel Growth Fund (ACBGX: news, chart, profile) entirely into cash on Jan. 24. Because Bonnel leaves the cash management to a partner, he's not entirely sure of the money market-type investments in the fund now. Instead he's focused on the market, anxious to get back in.

The move to cash is interesting because investors can view it in different ways. Only time will tell which view is right, but both sides merit consideration.

Bonnel says he is protecting investors, minimizing losses he foresees in the stock market. He's calling for the Dow Jones Industrial Average ($INDU: news, chart, profile) to bottom out at 5,000, with the Nasdaq Composite ($COMPQ: news, chart, profile) hitting the floor at 750. That's a drop of roughly 33 percent on the Dow and 50 percent on the Nasdaq.

The critical view of his move, however, is that Bonnel gets paid to invest in mid-cap stocks, and is now giving his shareholders what amounts to a very expensive money-market fund that is positioned to miss some or all of any market rebound.

"I consider myself a damned good mutual fund manager, but a poor stock picker," Bonnel explains. "In a good market, I'm going to get 60 percent of my picks right. In a bear market, when 90 percent of stocks are going down, I'll be right less often.

"Why should I try to find stocks that will be up a lot three years from now when I have to ride a 30 to 50 percent decline before they turn around?"

It's a question a lot of investors are asking given current market conditions. But few mainstream fund managers -- excluding those running bear-market funds -- have allowed themselves to ponder dumping everything, thanks largely to past history. Former Fidelity Magellan (FMAGX: news, chart, profile) manager Jeff Vinik, for example, was vilified when he moved the giant fund into bonds while the bull market was still rolling. Likewise, Brandywine (BRWIX: news, chart, profile) manager Foster Freiss saw money flood out of his fund after an ill-timed decision to go entirely to cash.

In those instances, investors didn't see the manager as "protecting" them, they saw the manager as "missing out" or "just plain wrong."

Bonnel gets a bit of a pass on that emotion because his move comes during a downturn. That makes "protection" a bit more palatable. He also benefits from having a smaller fund (roughly $110 million) in which his name is on the marquee, and where he has few institutional investors clamoring for him to stop messing up their asset allocation. The manager of a larger fund in a big family might be under too much pressure to make such a daring move.

"Stock fund managers aren't paid to sit on cash," says Leonard Goodall of the No-Load Portfolios newsletter, "but they're not getting paid to lose money either. If he had done this in March of 2000, near the market's high, he would have been a genius but all of his shareholders would have jumped the ship. Three years of losses later, and you have to admit this will look conservative and smart to a lot of people."

But some investors may wonder what took Bonnel so long and use his past inactivity to question his current timing decisions.

Bonnel actually approached his board of directors about asking shareholders for permission to sell short -- a way to make money when stocks decline in value -- back in 2001. The board tabled his request. But if Bonnel was so negative back then, it's fair to wonder why he didn't go all-cash and spare investors the losses they have suffered since. Moving to cash required no board or shareholder approval.

In fact, Bonnel cashed out last September, but changed his mind during October's rally, only to go back to cash in January because "it wasn't the bull market I was looking for." While investors paid the costs for all of those trades, they also benefited from being out of the market, as Bonnel's fund was among the top performers in its peer group while he made those adjustments.

Bonnel is prepared to stay in cash indefinitely and expects to miss out on the precise market bottom, which may upset investors hoping for growth.

"But if the market drops 20 percent and I miss the first 10 percent of the rebound, I'm still ahead of the game," he says. "I will be able to be back in the market in a matter of minutes when I see the right conditions, and I can't wait to be there. I'd love to be wrong about where I think the market is headed, but I can't invest against the way I feel about the market right now."

http://cbs.marketwatch.com/news/story.as...

-- posted by KLR

» Happy - Brinker Declares Death of "Buy and Hold"

When I heard Brinker say this, I couldn't help but think we are near the bottom.

Four years ago, when I read in the Chronicle that Steve Young and some of his friends were orgainizing a venture capital firm to provide capital to new tech start-ups in Silicone Valley,
I pointed out we were probably near the top.

-- posted by Happy

» mdorsey - Re: Brinker Declares Death of "Buy and Hold"

On a fundamental basis (PE, etc.) I don't see this level as anywhere near the bottom. OCICBW

-- posted by mdorsey

» Kirk - Stock trading website & business for sale on Ebay

One of my sponsors is selling his PROFITABLE business due to poor health. I wonder if this is a case where he does better just trading his system for himself than trying to sell his eBooks?

Performance: http://www.stockstrategy.net/performance...

I've often thought folks with systems like this could partner with our web site and post a trade a month in real time as a sample of their work. Then if readers here wanted to get more than one trade a month (or week or whatever time frame) then they would buy the system. I bet they could expand the business to include email trade advice for those that don't master the technique but want to buy and sell based on the system. Perhaps post a "trade a week" for free here and then offer a "trade a day" via email. I'd be interesed to see how well this works over time as I have seen many small traders with small followings build up some nice results.

BTW, I don't consider "Market timing" the same as "trading" as trading is a profession that takes work just like any job.

Hello,

I am writing to let you know that I am selling my stock trading business and I thought that you might be interested in it. The business is located at www.stockstrategy.net. I sell a stock trading system that I created called 'The Index Adjustment System'.

I must sell the business because I am in poor health and it is difficult for me to keep the business going.

I have decided to auction the business on Ebay.

The business made a net profit of $4,054.00 in 2001, and a net profit of $4,006.00 in 2002. A copy of my Schedule C's will be provided to the winning bidder.

I've set the reserve price for the auction at only $5,000.00 in order to facilitate the sale.

If you are interested in the business, I can provide you with a copy of the stock trading system ebook. Further details about the business and the auction is located in the Ebay listing, including a full business profile. This link will take you to the Ebay listing.

http://cgi.ebay.com/ws/eBayISAPI.dll?Vie...

If the link above is not working, try searching on the item number which is 2524437207, or go to the catagory 'Business & Indrustrial', then to the 'Businesses For Sale' subcatagory and then to the 'Web Sites' subcatagory.

If you have any questions, please contact me at mike9a@prodigy.net or at pennfield@stockstrategy.net.

Regards,

Michael Hoey
Owner
www.stockstrategy.net

-- posted by Kirk

» KLR - Re: Stock trading website & business for sale on Ebay

This looks like a sure winner to me. The bid is already up to $2,000.

What's attractive about this particular stock trading system is that you don't have to know anything about the market. You can learn as you go and this guy will teach you for free for thirty days too....

...Knowledge of the stock market is helpful, but is not required. The current owner will provide 30 days of training for maintaining the stock trading system statistics and maintaining the web site....

I figure you could offer the entire $5,000 purchase price to be paid from an assignment of future profits from using the system.

The seller should jump at an offer such as that knowing that he would be paid in practially no time at all.

-- posted by KLR

» Kirk - Re: Re: Stock trading website & business for sale on Ebay

Yes, I think we should offer the opportunity to those folks on the WSU discussion thread where they can get a whole business and personal instruction for the cost of the WSU system. WSU won't publish results while this business has had good results for some time.

-- posted by Kirk

» Kirk - Simple Timing Models

Some nice tables that are too much work to reproduce here.

Of course, you can make thousands of models that work to predict the past. The real trouble comes when you try to make these models predict the future.

-- posted by Kirk

» bob90245 - Re: Simple Timing Models

From the article: "Buying and holding the Nasdaq from 1963 through the end of 1997 resulted in a compound annual return of 11.8%, a 59.5% maximum drawdown (1972-74), and an annual profitability (percentage of profitable years) of 70%."

Yet, the Nasdaq itself didn't begin trading until 1971.

http://www.nasdaq.com/about/about_nasdaq...

-- posted by bob90245

» Jas_Jain - Re: Simple Timing Models

"Of course, you can make thousands of models that work to predict the past. The real trouble comes when you try to make these models predict the future."

Kirk,

Here is one of the best examples of the above:

http://www.rocketsciencetrading.com/

Poor subscriber paid $1,000 to turn $4,000 into several millions based on model results. The results upto the past one year are actual and beyond that are for the model before it was put into practice. It will need to gain 25% for the subscribers to just get even.

Too many former rocketscientists as market-timing charlatans in the stock market?

Jas

-- posted by Jas_Jain