Market Timing: Should You Attempt It?
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- Kirk
- Normxxx
- Kirk
- Normxxx
- Normxxx
- Normxxx
- radiodude
- Kirk
- Normxxx
- Normxxx
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» Kirk - Re: Re: Book: All About Market Timing
In response to message posted by Normxxx:That's right. Do the math. Let me know if the 200dma did better than buy and hold over the last 5 years.
Out of curiosity, how have the "Dogs of the DOW" done the last 5 and 10 years?
I remember that was all the rage back in 1998 when I left HP. I think dividend stocks really sucked between 1998 and 2000. They sucked just long enough for folks to give up on that DOG idea back tested model before the bear hit. I wonder if it is ahead now?
-- posted by Kirk
» Normxxx - Re: Stops and MAs are losing strategies
In response to message posted by Kirk:Well, you are not going to get me to defend SMAs. All I am saying, is that over the long haul (and not just the last 5 years) they work better than buy and hold. As for the hypothetical market you assumed, if you can assume a market that will kill the the smas, I can assume a market that will kill your approach (assume that the market P/Es drop 75% or so and don't come back). In fact, I don't have to assume, I can just point to the Nikkei!
Unless, of course, you do judicious stock picking (and don't ride them to hell if you think they are not coming back). But a lot of less than effective stock pickers saw their stocks lose 90-95% of their values, and are still down a ton.
Since I didn't have the time to stock pick and I don't trust anyone else to do it for me, I generally trade the indexes (only occasionally the options, and then I prefer to sell them). Maybe I will subscribe to your newsletter. If JJ likes it, it must really be something!
As you know I use the Seasonal Timing System (for almost the last 4 years), which has sailed through this Bear brilliantly. None of my circuit breakers were triggered in the last 10 years or so (about the time I have been using them), but largely because I was already out of the market when they would have triggered. Yes, I am well aware of the pitfalls of stop losses and trend following models, which is why I do not use the one and make judicious use of the other.
My circuit breakers are not stop losses; they use ma's, but I use a set of them (4 to be exact), and they are a last resort (so I can set a really low threshold). (I swear I will do a writeup of them within the next couple of weeks.)
STS works fine in a "trading range market." It has proven itself in all kinds of markets over the last 50 years.
You're right about stocks being an option on the economy, but there is nothing to prevent the P/E ratios from falling 75% or so and not coming back. Stocks have no intrinsic value. Unless you can find a buyer, you are stuck with them. (See my post on how stocks became a giant Ponzi scheme.)
I know a lot of people that have espoused your philosophy of buy and hold and are currently still down 75% or so. I am related to one of them. Does anyone know where the average fund is today compared with January 2000?.
I don't know why you insist that what you are doing is "buy and hold." It seems to be anything but. You buy when they are low, you sell when they are high, maybe buying some back on a pullback if you still like them. Granted, your selling strategy (assuming you still like them, unlike LU and T) is more of a money management strategy, but it is NOT "buy and hold," which takes no heed of any other strategy. I.e., as interpreted by Wall Street, "buy and hold" is really "buy and hold forever!" Haven't you read the cautionary tales where little old ladies died as multimillionaires because they refused ever to sell their stock!
-- posted by Normxxx
» Kirk - Re: Re: Stops and MAs are losing strategies
In response to message posted by Normxxx:I don't think I have ever claimed I was buy and hold.
What I recommend for others is an asset allocation strategy where you buy and hold BUT rebalance between stocks and bonds when one goes on a run driving your target allocation out of whack.
Have you read these?
What I do takes a great deal of time. The returns for me have been better than buying and holding while working a job so I continue. The newsletter helps me articulate my thoughts and has done pretty well. Some have even found value in it. 
Many read it and still don't get the concept of a total portfolio and risk management so they don't do so well as they are looking for a list of stock picks.
-- posted by Kirk
» Normxxx - Re: Re: Re: Book: All About Market Timing
In response to message posted by Kirk:Actually, the last I saw (about 2 years ago) it was working again after NOT working for a couple of years. (It did not fail by much though, as I recall.) But the DoD is measured against the Dow, so you can have down years even when it is working. I don't think I like that. (Yes, ma'am, the operation was a success but the patient died.) Anyway, the DoD approach is only spectacular when measured against the average fund, which is usually beaten by all of the averages.
-- posted by Normxxx
» Normxxx - Re: Re: Re: Book: All About Market Timing
In response to message posted by radiodude:Please re-read my earlier posts. I do not, repeat do not use a SMA for timing. That was strictly a worst case example to show that B&H sucks. I suggest you thank God every night that you are not Japanese.
-- posted by Normxxx
» Normxxx - Re: Re: Re: Stops and MAs are losing strategies
In response to message posted by Kirk:Yes, I too swear by Asset Allocation/Portfolio Theory. But using Dynamic Asset Allocation/Dynamic Portfolio Theory, you can market time for each of your asset classes. Do you really only sell to rebalance? --It sounds much more flexible to me. For example, by those standards, you would never have sold stocks during the bear, but only sold bonds and bought more stock.
Don Hays and many others use an asset allocation scheme where the allocation of funds to classes is not fixed but goes up or down according to exogenous market measures. That is, they'll use something like the FED model to decide what proportion of funds to allocate to stocks and what to bonds.
P.S. Modern Portfolio Theory largely bombed during the bear because it only followed the market down and bought all the way down. A 3 year bear was a bit much for it.
-- posted by Normxxx
» radiodude - Re: Re: Re: Re: Book: All About Market Timing
In response to message posted by Normxxx:Norm said to radiodude: Please re-read my earlier posts. I do not, repeat do not use a SMA for timing.
Norm: I don't need to re-read your posts, I was just responding to this statement made by you to Kirk on this public board:
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.
Again, I just don't want you or anyone else reading this thread to be fooled by randomness or data mining. I always find it funny that people zero in on a 200 tap filter since that fits the data better than other configurations. Whoever came up with the 210 tap filter must have really been mining the data to come up with that optimal number of days.
You also said that one would add "a little hysteresis to keep you from whipsawing" which would add yet even more signal processing to experiment.
-- posted by radiodude
» Kirk - NYSE Specialist Short-Sale Ratio, January 1977 to Present
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From http://www.trendmacro.com/a/luskin/20031...
The NYSE: Use It, Then Lose It!
Monday, October 20, 2003
Donald Luskin
The NYSE specialists have an unfair monopoly -- and here's how you can take advantage of it.
The following is an "Ahead of the Curve" column published October 17, 2003 on SmartMoney.com, where Luskin is a Contributing Editor.
I hate the New York Stock Exchange. I admit it — I hate the place. I always have and I always will. So even though I have no objection to executives earning huge salaries and bonuses, I've been positively tickled to see the NYSE dragged through the mud over ex-Chief Executive Dick Grasso's mammoth pay package.
OK — I'll wait a moment to rant and rave about that satanic den of sin at the corner of Broad and Wall. First, let's take a look at a way we can use the NYSE to make some trading profits.
For years the NYSE has published statistics showing the value of its listed shares that have been sold short. (Remember, selling short means selling shares of stock you don't actually own, in the hope that they will go down so you can make a profit by buying them back cheaper). The NYSE breaks these statistics down into several categories, one of which is the value of shares sold short by the NYSE's own specialists. (The specialists are a handful of floor traders on the exchange who preside over day-to-day trading, in particular NYSE-listed stocks to which they're assigned).
The specialists are very active and very sophisticated traders (you'll learn a lot more about them later when I start to rant and rave). Their short sales always represent a significant fraction of total short sales. Since 1997, specialist short sales have averaged about 40% of the total — they've been as high as about 62%, and as low as about 20%. Right now it's at the low end of the range, at 28.2%.
This percentage is called the NYSE specialist short-sale ratio, and it has been studied by technical market analysts for many years. In fact, it's such a relic, sometimes today's traders forget to look at it. That's a mistake.
Fred Goodman, the dean of technical analysts who writes a daily report on my Web site, has been focusing on the NYSE specialist short-sale ratio lately, and talking about today's low level in the long-term context of market history. He thinks it's very bullish for the long term, even though many of his other technical indicators are extremely cautious at the moment.
Fred has determined that the evidence of history shows that the specialists are sharp dudes — and you don't want to bet against them. When the ratio is low — in other words, when the specialists as a group have only relatively small short positions — the market is more likely to perform well over the long term. But when the ratio is high — and the specialists are holding large short positions — the market could be ready for a drop, and as Fred says, "it was best to be out of the market or net short yourself."
Let's test it out with real numbers. Using Fred's long-term data on the NYSE specialist short-sale ratio, I looked at the one-year moving average of the ratio from January 1977 to the present. I used a long-term average to smooth out the short-term volatility in the data. The average reading for the smoothed ratio for that period has been about 40%. Here's a chart of all the data.
NYSE Specialist Short-Sale Ratio, January 1977 to Present
One-year moving average
<img height=279 alt="" src="http://www.trendmacro.com/a/luskin/20031..." width=366 border=0>
Here's a table that shows one-, two- and three-year returns for the S&P 500 — for the whole period overall, and then broken out by the times that the smoothed NYSE specialist short-sale ratio was either above or below its long-term average. It turns out that Fred was right — in spades. The average returns for the periods when the ratio was below average (when the specialists were less short than usual), were twice as great as the periods when the ratio was above average (when the specialists were more short than usual).
Average Annualized S&P 500 returns, January 1977 to Present
| All Periods | Ratio Above Average | Ratio Below Average | |
| 1 year | 10.1% | 5.7% | 13.7% |
| 2 years (annualized) | 10.2% | 5.3% | 14.0% |
| 3 years (annualized) | 10.8% | 6.8% | 13.6% |
Now let's put a finer point on it. What if we excluded the times — the majority of times — when the ratio was close to the average, and only look at the rare times when the ratio was at an extreme? Here's a table that shows the results for those extreme times when the ratio was below 37.5% or above 42.5% — that's 2.5 percentage points away from the long-term average in both directions. Then the results get even better.
Average Annualized S&P 500 returns, January 1977 to Present
| All Periods | Ratio Above 42.5% | Ratio Below 37.5% | |
| 1year | 10.1% | -0.5% | 16.1% |
| 2years(annualized) | 10.2% | 0.6% | 17.4% |
| 3years(annualized) | 10.8% | 2.0% | 17.1% |
Now look back at the chart showing the smoothed ratio since 1977. You can see that, right now, we're at an extreme point — and extremely bullish point. But you can also see that this is not a short-term indicator. The exact moments of the extreme lows haven't been times when the market was immediately poised to explode to the upside. But as the numbers show, from those same points a little bit of patience was richly rewarded.
Now, here's the ranting and raving (I'll keep it short).
Just what do you think it is that makes the specialists so smart that over such a long period of time they've been so very right on the market — so right that someone like Fred Goodman can use their trading as a technical indicator? Do they simply have bigger brains than the rest of us?
Nope. They're just ordinary guys and gals (mostly guys), but they have something much better than brains: a monopoly. They don't have to compete with other market makers like the big Nasdaq traders do. The NYSE specialists have a monopoly on order flow in the stocks of most of the biggest and most important companies in America. They see it all, and they set the prices.
Of course the rationale for the specialist's monopoly — a myth that Richard Grasso became fabulously wealthy for telling so often and so well — is that the specialist is there to serve the public by providing liquidity and making a fair and orderly market. But in reality, the specialist is like a banker who'll only make loans to people who don't need the money. When the chips are down and the public really needs liquidity — like in the crash of 1987 — the specialists run for cover.
Remember the crash of Oct. 19, 1987? That's when the NYSE became effectively non-operational because orders came in so much faster than their antiquated systems could handle. Richard Grasso — before he became CEO — spent the next two years upgrading those systems. But at the same time, he managed to blame the NYSE's customers and competitors for causing the crash.
Remember the NYSE's campaign against "program trading" — large computer-driven trades linked to the index futures markets in Chicago? When Grasso was done lobbying, the NYSE had persuaded the Securities and Exchange Commission to let them impose so-called "circuit breakers" that restrict "program trading" when the market moves by more than a given amount — and shuts down the exchange altogether when the market moves by a really large amount.
What other business — especially one supposedly dedicated to serving the investing public — would plead with its regulators to allow it to restrict its competitors and its own customers — just at those moments when investors need the NYSE the most? It's like a fire-insurance policy that will gladly pay your claim — just as long as your house doesn't burn down.
OK — that's it for the ranting and raving (for now, at least). The good news is that with Grasso's pay scandal, the NYSE is under more scrutiny than ever.
And maybe it's even better news that, as long as the NYSE specialists enjoy their monopoly, at least we can use their short-sale data to make a little money ourselves from their unfair advantage. <img height=15 src="../../images/favicon.gif" width=16 align=top border=0>
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-- posted by Kirk
» Normxxx - What Market Timing IS -- and What It Is NOT
Robert Folsom's Market Watch
What Market Timing IS -- and What It Is NOT
11/11/2003 8:14:08 AM
It's both curious and disturbing to see "market timing" associated so closely with the mushrooming mutual fund scandal. Here's a sample of the headlines that appeared when I typed the phrase into Google's news search this afternoon:
"Market timing scandal grips pension funds"
"Tarred by Market-Timing Brush, Hedge Funds Quit the Business"
"Market timing inquiry expands"
"Putnam chief on way out: Market-timing scandal takes toll"
"Fund managers quizzed on market timing"
"Fund market timing tips the scales"
This makes market timing sound almost pornographic, or even something really bad -- like being a politician.
In fact, the phrase is being used as a catch-all to describe "stale pricing," namely when investors exploit the one-session price lag between international stocks and the mutual funds that actually hold such stocks. Or the media has used the phrase to describe after-hours trading by hedge funds, in sweetheart deals with mutual fund managers.
Either way, "market timing" is exactly the wrong way to describe stale pricing and after hours trading. Both involve the sort of manipulation that removes the risk of investing, in ways that mutual fund companies offered only to a few select customers or clients -- but virtually never to their shareholders.
REAL market timing is NOT a "sweetheart" deal, nor is [it] the "buy and hold" scam that fund companies have preached to shareholders. Market timing is how individual investors can assess risks and opportunities, once they have taken control of their OWN financial future.
-- posted by Normxxx
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