Most investors have been deceived about Market Timing

Do a google search on “market timing”.  At any time you find almost all the pages that comes up will say something like market timing doesn’t work.

This is caused by a lack of agreement regarding what market timing is and what market timing is not.

Market Timing vs Buy and HoldAfter all, everyone knows what “buy and hold” is.  That’s simple.  Just buy and never sell.

A similar agreement on the definition of market timing is impossible.

Many people – especially from the buy-and-hold philosophy – define market timing in such unrealistic terms that it can’t possibly work.  Therefore adding more credence to the buy-and-hold strategy.

You will typically hear market timing described as:

  • Read today’s media headlines and predict tomorrows market moves….. or
  • Buy at the exact top and sell at the exact bottom!

I would be the first to agree, those types of strategies are doomed to failure.

Here is my definition of profitable investing using market timing, and I’ll prove to you it works. In fact it beat S&P500 by 37%!

bull vs bearThis strategy provides for profitable investing during strong markets and letting the market take me out of the market as it weakens.

It effectively helps me to….

  • Stop risking additional funds during market draw-downs
  • Gets me out of the market fairly near the top
  • Tells me when it’s safe to start buying again

Of course, no investing strategy is foolproof, and I’ll discuss those failures later in this article.

But I only have to beat the S&P500 to do better than buy-and-hold strategies that typically use the S&P500 as a measuring stick.

And this strategy has beaten the S&P500 by 37% for the years 2006 through almost the end of 2017 even with the failures noted above!

To prove to you market timing works I’ll show you three items:

  1. A chart of market timing signals against the price of the S&P500
  2. A table comparing the profitable investing market timing strategy result to the buy-and-hold strategy
  3. Failures of market timing don’t materially affect the positive outcome

1) Chart of market timing signals against the price of the S&P500

Proof Market Timing Works

Proof Market Timing Works

This image has the On Balance Volume (OBV) and the OBV 20 week moving average in the top panel.  And the price of the S&P500 in the bottom panel.

OBV indicates the level of demand for stocks very accurately.

The direction of the OBV 20 ma and the actual value of the OBV can be used for market timing.

  • When the OBV 20 MA is moving up it indicates increasing demand for stocks.  Even more so if the OBV is above the OBV 20 ma.
  • When the OBV 20 MA is moving down it indicates decreasing demand for stocks.  Even more so if the OBV is below the OBV 20 ma.

The red vertical lines on the chart show when demand for stocks was decreasing.  The green vertical lines on the chart show when demand for stocks was increasing.

So using this market timing strategy I buy when a green line appears and stop buying and adjust stops frequently when a red line appears.

2) Comparing the profitable investing market timing strategy result to the buy-and-hold strategy

Simple Market Timing Beats S&P by 37%

Simple Market Timing Beats S&P by 37%

Here are the results of the market timing strategy that includes the years 2006 through the latter part of 2017.

The columns include the following information:

  • The date column shows the dates the market timing posture changed between buy and hold.
  • The line color and strategy shows the posture associated with the date.
  • The SP500 start value and SP500 ending values shows the price level of the S&P500 at the date the strategy changed.
  • The SP500 Points Gained Using Market Timing shows the SP500 points gained during the time after a green vertical line on the chart and the red vertical line on the chart.
Market Timing Beats S&P 500 by 37%

Market Timing Beats S&P 500 by 37%

As shown on the table and the chart the profitable investing market timing strategy gained 1901.14 S&P500 points while the buy-and-hold strategy gained only 1378.88 points.

That’s a 522.26 improvement over buy-and-hold.

A 37.8% improvement for simple market timing over a buy-and-hold strategy!

No investing strategy is foolproof.  The trick is to minimize the failures.

For buy and hold investors the biggest failure was the drastic drop in stock prices during the 2007 to 2009 recession.

This time period saw the stock market drop from a price of 1576 to 681!

Proponents of buy and hold will say something like – Yeah but if you held on long enough you got everything back.  I agree.

But what if you needed your portfolio for retirement in 2009 and it was down almost 60%!

You would have had to wait until approximately mid 2013 to get back to even.  That’s an additional 4 years of waiting.

Not for me thanks.

I’ll step aside during major bear markets that are easily recognizable by weak demand for stocks..

3) Failures of market timing

Market timing is designed to avoid the devastating bear markets.

But there are times when the caution flag is up and the market increases.  And there are times when its deemed OK to Buy and the market decreases.

What do we do then?

Well because my intent is to always be invested we sail right through those periods because I have stops in place on every position.

These moves against the market timing strategy are shown in the table and summarized below

  • SP500 Points Missed During Caution Periods total 162.41
  • SP500 Drawdowns Avoided During Caution Periods 684.67

Even totalling the periods when market timing failed it was still ahead of buy-and-hold by 522.26 points!

So even though market timing is not perfect it certainly can beat a plain buy-and-hold strategy.

What to do now?

Depending on how you measure it the stock market has been in a bullish mode for somewhere between 7 and 9 years.

That’s a long time and at some point it’s going to end.

For buy-and-hold investors, a significant correction might arrive at just at the worst time.

Stay tuned to and it’s highly likely that your portfolio will be able to avoid most of the next major draw down in stock prices.

And in the meantime you will be able to build your portfolio effectively using profitable investing strategies and superior stocks.