Market Timing: Should You Attempt It?
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- Kirk
- Normxxx
- Q_out
- Normxxx
- Kirk
- Kirk
- Normxxx
- Kirk
- radiodude
- Normxxx
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» Normxxx - Re: Re: Re: Re: Market Timing on the QT
In response to message posted by Kirk:His newsletter is not his primary source of income. His primary source of income is investing his own money (isn't that refreshing!) So he lives in NH and is semi-incommunicado (no advertising; no website or eMail address; no telephone, except to accept subscriptions. The newsletter is called, The High-Tech Strategist.
Since he has been solidly bearish from at least 1998 (I believe; I've only been getting his newsletter for 2 years), he is often quoted by Alan Abelson in Barron's. But others know of him as well, and he seems to have a good record over the last 10-15 years or more.
Business Week
As you can see, his bearish overall position doesn't stop him from playing the rallies.
-- posted by Normxxx
» Q_out - Re: Re: Market Timing on the QT
In response to message posted by Kirk:Perhaps this would help.
<img src="/files/mysites/qout/svm-1.gif" width=450 height=294>
<img src="/files/mysites/qout/bhoestarts.gif" width=53 height=34 align="left">
Q_out
DISCLAIMER: My words and observations are general in nature, and are not meant as specific investment advice. Individuals should consult with their own advisors for specific investment advice.
-- posted by Q_out
» Kirk - Re: Re: Re: Market Timing on the QT
In response to message posted by Q_out:Great! Thanks!
The Fed Model
<img src=http://www.suite101.com/files/mysites/qo... width=450 height=294>
*Ratio of S&P 500 index to its fair value (12-month forward consensus expected operating earnings per share divided by the 10-year U.S. Treasury bond yield) minus 100. Monthly through March 1994, weekly after.
Source: Prudential Securities, Thomson Financial
-- posted by Kirk
» Kirk - Re: Re: Re: Earnings Trends & Some Context for the FED Model.
.In response to message posted by Normxxx:
You are FAMOUS!
http://www.suite101.com/articles.cfm/270
You might want to send that link to all your friends and relatives. 
Also, consider telling us a bit more about yourself in your profile as some will click that link after reading the article. Why should Michael Moore get all the free air time for getting honored?
I think I'll move some of the comments here to the forum for that article where the discussion can occur there.
-- posted by Kirk
» Kirk - Book: All About Market Timing
.<img SRC=http://images.amazon.com/images/P/0071413316.01._PE30_PI_SCMZZZZZZZ_.jpg WIDTH=112 HEIGHT=169 ALIGN=LEFT>All About Market Timing
by Leslie N. Masonson
# Paperback: 246 pages ; Dimensions (in inches): 0.71 x 9.06 x 6.04
# Publisher: McGraw-Hill Trade; (October 3, 2003)
Book Description
Shell-shocked investors have lost patience with the traditional buy-and-hold approach to investing. All About Market Timing arms investors with simple, easy-to-use timing techniques that they can use to enter rising markets, exit (or go short) falling markets, and make consistent profits in both market environments while protecting against catastrophic losses.
Compelling arguments demonstrate the superiority of basic timing over buy-and-hold, while step-by-step instructions show how uncomplicated timing can be. Specific investment vehicles are recommended that fit well into most timing strategies. Investors who want to time the market using their own strategies are provided with information on available software and Web sites. And those investors who are looking for advisors to help them are provided with unbiased rating services to help them select the advisor that is best for them.
From David Korn's Newsletter Guest Editorial
Title: Market Timing Protects You Against Devastating Losses - Buy and Hold Does Not
Author: Leslie N. Masonson
Have you recently read about the unethical mutual funds that have permitted some of their large hedge fund clients to trade after hours to make a fortune at your expense? The term "market timing" was bandied about by Attorney General Spitzer and others to describe the actions of some of hedge funds who took advantage of discrepancies in the price of international funds due to time-zone differences, and trade in mutual funds for a profit. Hedge funds invested in international mutual funds late in the day, expecting to take advantage of similar movements in the international markets tomorrow that parallel today's action in the U.S. stock market, and make a profit. This is NOT market timing, but simply "time-zone arbitrage" and scalping. Some people would also call it stealing from mutual fund investors who have to absorb the extra trading costs of this type of scheme. So much for mutual funds taking care of your interests.
Market timing is the practice of using specific tools or strategies to be long the market during up trends and in cash or short the market during down trends. Market timing is a mechanical investment approach that determines when to buy and when to sell a stock or mutual fund. Many market timing approaches are based on signals from technical indicators or other variables based on historical back-testing over decades.
Market timing has been maligned by 99% of Wall Street professionals as a very risky strategy that investors should avoid at all costs. Nothing could be further from the truth. Buy-and-hold is touted as the way to build long-term wealth. That is only true in bull markets. In reality, buy-and-hold is a very risky strategy because in bear markets, your investments can get decimated. Just compare your mutual fund statements from March 2000 and today to see how much you have lost if you stayed in the market. Millions of individuals had to postpone retirement or find jobs just to survive. That is the problem with buy-and-hold. There is simply no protection against a devastating bear market. You need protection, and that is where market timing comes into play.
Bear markets seem to occur every four years or so, like clockwork. Therefore, intelligent investors should take this fact into account when handling their portfolios, and protect themselves against loss of principal. Since 1900, the average bear market has resulted in a loss of 30% and has lasted just over 17 months. The 2000-2002 bear market resulted in a loss of 49% for the S&P 500, and lasted about 30 months. The key to successful investing is to protect your principal. That means you have to take action before the market tanks. Investors lost over $7 trillion from March 2000 through October 9, 2002!
Market timing is not foolproof and certainly does not come with a money back guarantee. Market timing also doesn't work 100% of the time (if it does, let David know!) Market timing attempts to find reasonable entry and exit points that capture 75% or so of a move in either direction. Believe it or not, market timing can be wrong 60% of the time and you can still make money
because your winning position should exceed your small losses. Professionals are quoted as saying that market timing has to be right 70% of the time to make money. That is not true.
Have you seen the oft-quoted argument put forth by the media that missing the 10 or 20 best days in the market greatly reduces an investor's performance compared to buy-and-hold? Guess what? That is only half the story. What they leave out, is that by missing the 10 or 20 WORST days in the market, and investor would greatly improve his/her performance versus the buy-and-hold.
To prove my point, consider that missing the 20 WORST days from 1984-2001 would have returned 19.12% annually, compared to missing the 20 BEST days that returned 6.1%. Missing the 20 best and worst days combined results in an annual return of 13.5%. As you can see, missing the worst days in the market is critical to protecting your capital. In reality, the subject of missing the best days is contrived by many Wall Street institutions to bolster their case that buy-and-hold investing is the way to go. No one would miss the best days or worst days, realistically speaking. It is interesting to note that mutual fund managers of large cap funds had an average portfolio turnover of 111% over the past year according to Morningstar. That means that they bought and sold their entire portfolio at least once. They are market timing while telling you the opposite.
Over the past decade, I have been researching the subject of market timing and the buy-and-hold mantra. My conclusion is that buy-and-hold is a very risky investing approach, since you are exposed to the market's fluctuations 100% of the time. Additionally, I have concluded that the way to preserve and increase your wealth is to be "out" of the market, in cash or short -- as much as possible so that the bad days don't decimate your portfolio.
In my just published book, All About Market Timing, the facts about buy-and-hold and market timing are highlighted for all to see. The following five simple market timing strategies are provided and fully explained that have beaten buy-and-hold with much less risk:
1. Best Six Months Strategy
2. Presidential Cycle Year Investing
3. Nasdaq 25 Week Moving Average Investing
4. Value Line 4% Strategy
5. Nasdaq 6% Strategy
David Korn has provided you with significant information on the first and second strategies listed above in previous newsletters. Therefore, I wanted to briefly cover two other strategies.
NASDAQ 25 WEEK MOVING AVERAGE INVESTING
To use the Nasdaq 25 Week Moving Average timing investment strategy, just bring up a weekly chart of the Nasdaq Composite index. You can use Stockcharts.com, for example, and place a 25-week simple moving average on it. A buy signal is generated when the closing price of the index crosses over the moving average line from below. A sell signal is generated when the closing price of the index crosses over the moving average line from above. On the sell signal, a short position is taken. Back-testing this strategy from 1971-2002 has produced some fascinating results. If you had invested $100,000 in this strategy, it would have resulted in a profit of $4,274,878 or 4,475% compared to a buy-and-hold profit of $960,000 or 968%. This timing strategy had an annual return of 13.52%, and only 42% of these trades was even profitable!
NASDAQ COMPOSITE 6% WEEKLY STRATEGY
Another timing strategy with the Nasdaq Composite is the Nasdaq 6% Weekly Strategy. A buy signal is generated when this index rises 6% from a previous low (irrespective of how many weeks ago that was). Likewise, a sell signal is generated when the index falls 6% from a previous high, and the Nasdaq Composite is "shorted." Over the same 32-year test period (1971-2002), this strategy produced annualized returns of 18.77%. In dollars, it produced a profit of $15,209,502 compared to $1,273,310 for the buy-and-hold. Once again, these results came even though only 54% of the trades were profitable.
Any of the five strategies in the book can be used alone or together with a certain percentage of your assets. Each of the strategies has been back-tested and there are equity curves and summary statistics. Market timing is best used with tax-deferred accounts so that taxes are not an issue. Additionally, use index funds, exchange-traded funds, sector funds, or leveraged funds (e.g., funds from the Rydex and Pro Fund families), and NOT individual stocks.
Market timing protects your capital by being in the market when the odds are in your favor. During market drops you can safely be invested in cash equivalents or go short with ETFs (in your non-retirement accounts) or leveraged funds (both retirement and non-retirement accounts). Successful market timing is a strategy that can be used by investors that posses the following characteristics: patience, discipline, self-confidence, independent decision-making and emotional stability.
In summary, the Wall Street conventional wisdom that market timing should be avoided is not based on sound research. Investors have to look out for themselves, and they should assess the value of market timing vs. buy-and-hold. By spending time determining the true value of each, I am sure investors will choose the right approach that fits their personality and risk tolerance.
- Leslie N. Masonson
My thoughts
Sure, market timing can protect you against losses, but so can just staying in cash 100% of the time. You really want to compare strategies vs buy and hold inclusive of transaction fees and taxes.
I view these articles as GOOD READS:
- Asset Allocation Review shows how asset allocation smoothes portfolio returns
- Using Asset Allocation to make money in a Flat Market
- More Articles on this site
- Winning on the zigs, losing on the zags Explains how the average investor made 2.6%, roughly 1/5th the return of the S&P500 between 1984 and 2002.
- Books to Teach Yourself about Investing
The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly fifty years in this business, I do not know of anybody who has done it successfully and consistently. I don't even know anybody who knows anybody who has done it successfully and consistently. Yet market timing appears to be increasingly embraced by mutual fund investors and the professional managers of fund portfolios alike.
[John C. Bogle in Common Sense on Mutual Funds]
"We recommend subscribers with conservative investment objectives invest 20% to 30% of CASH RESERVES in the QQQ shares in order to take advantage of this opportunity". Robert Brinker, a famous market timer - 10/16/2000 Subscriber Bulletin when QQQ was at $83 just before falling to a low of $20 in the next two years. CASH RESERVES were 65% of his recommended total portfolio at the time!
-- posted by Kirk
» radiodude - All About Market Timing and Day trading on the edge
In response to message posted by Kirk:So, um, Masonson's last book of several years back is called Day Trading on the Edge, and Masonson was teaching people how to do 'effective' day trading. I'm just sitting here wondering if Masonson still does day trading as well as market timing, and if so, I'm wondering how the day trading might have worked out in the past few years.
-- posted by radiodude
» Normxxx - Re: Book: All About Market Timing
In response to message posted by Kirk:Kirk-- Even as simple a market timing system as being in the market when it is above its 200dma and out of it when it is below (with a little hysteresis to keep you from whipsawing) does better than buy and hold, It would have kept you out of most of our recent bear and gotten you back in in time for most of the recent rally.
There are any number of systems as good or better.
Sy Harding's version of the Seasonal Timing System (5 years of actual use through 31 December 2002- he only calculates on an annual basis, so 2003 will not be included until 31 December) has beaten the DOW by +16.5% to 2.9%, compounded annually, and the S&P by +13% to -0.4%. The gaps will close some this year (since he was out of the market from mid-May to end of September), but not by that much.
I really don't understand you buy and holders. Would you really have suffered through 13 years of the Nikkei and gone from 39000 to 8000? Not too good if you are my age. Especially as the Nikkei is still only aroung 11000.
I not only use the STS to time my equity assets entries and exits, but I also have a circuit breaker to take me out if that fails. I see no virtue in going down with the ship. One of these days, as in Japan, it may not come back up.
-- posted by Normxxx
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