Market Timing is simply trying to establish a strategy to aid in making buy and sell decisions of risky assets such as stocks and commodities. Basically an investor is trying to find a strategy or system to “time” when to buy and when to exit from an investment.
A market timing system normally tries to take into account technical aspects of movements of risky assets such as using the 50 day moving averages or 200 day moving averages which is a popular market timing method.
Market timing systems also try to looks at economic and sociopolitical fundamentals such as unemployment, economic growth, local or world GDP to take into account economic environments in addition to technical aspects of assets when coming up with an overall decision on the best time to enter and exit an asset class such as stocks or commodities.
TYPES OF MARKET TIMING SYSTEMS
There are literally hundreds of market timing systems available and in wide use. Everything from broken crosses and golden crosses to Hi Low Logic Index, Moon phases, Planet Orbits and the very popular 200 day moving average.
HOW EFFECTIVE ARE MARKET TIMING SYSTEMS
There is a variety of opinions on the effectiveness of market timing systems. For the most part investors seem evenly split on market timing systems and their overall value. Many investors feel that market timing in general is basically a way to justify trading systems and many investors have been caught in trading schemes over the years. Both retail and institutional investors have won and lost large sums of capital through following market timing systems.
Market Timing Systems Over The Course Of History
There are several independent organizations that have studied market timing systems to try to figure out if they do indeed have merit as to timing when to get into the market and when to get out.
Overall most of these studies have shown that most market timing systems do not seem to have any better track record at calling the best times to get into and out of an asset. It would seem that over time different market timing systems function well for short periods and then their performance drops off.
Market Timing Systems You Pay For
Is it worth paying for a market timing system? That’s definitely debatable. In general I have always found it best to do my own homework and pick a strategy that I have confidence in to keep me on the right side of market trend. It is this confidence that allows me to place the trades I do and have the confidence to know that if I am wrong I can either close the position, take a loss to get out or use options to try to either reduce the loss or rescue the position.
Market Timing and the Buy High Sell Low Reality
Despite what friends, fellow investors and neighbors may have you believe, Mutual Fund inflows of capital and redemption of units show that even today the majority of investors buying mutual fund units when markets are moving high and set new highs and redeem their units or sell their units when markets are collapsing.
Market Timing and Taking On Risk
Studies have also shown that investors seem less risk concerned when stocks are high and far more risk averse when stocks are low.
Market Timing and the Dalbar Study
The very famous Dalbar study indicated that an average investor earns less in stocks than he would if he simply bought an index fund containing all the stocks of the S&P 500 index. For history buffs, select this market timing link to read about the history of the S&P 500.
How I Use Market Timing
My market timing is a system I devised more than 30 years ago which takes into account sociopolitical, economic conditions, world events and includes the moving averages, investor sentiment, the Ultimate Oscillator, MACD (Moving Averages Convergence Divergence), RSI (Relative Strength Index), momentum and volume.
I take all these factors into account and apply them to my market timing calls in an attempt to be on the right side of the market direction.
My Market Timing Is Right Only Half The Time
Overall though I have always found that my market timing is right about 50% of the time. But that said, it is the general overall trend that concerns me and as long as most of the time I understand what the trend may be, then I have confidence to place my trades and accept the risk that comes with owning a very risky investment, namely stocks.
Market Timing And Why It Works For Selling Options
My strategy has always been conservative. I aim for small monthly returns through selling options which over time result in significant growth. NO MARKET TIMING SYSTEM IS PERFECT. That would be an impossibility. Because I know that any market timing system will be wrong 50% of the time I sell options rather than try to time when to buy and sell stocks, as selling options allows room for the market to fluctuate and stocks to rise and fall.
As well since markets fluctuate widely I have learned that stocks can become very over-valued in bull markets and very under-valued in bear markets.
To make sure that I DO NOT end up owning stocks at over-valued prices which of course would be harmful to my portfolio and its growth, I use the strategy of selling put options at put strike levels that are below the trading level of the stock. For example if the stock is trading at $65.00 and I believe it is over-valued, I would look to sell a put strike of perhaps $60 or even $55 depending on the put premium earned.
In a bear market, stocks are whipsawed a lot and move dramatically in both directions. But bear markets offer huge profits for selling put options and volatility in stocks climbs, pushing up option premiums, usually both put and calls. However put premiums are normally higher than calls in bear markets simply because stocks can fall further and quickly.
Market Timing and Staying Fully Invested In Bear Markets
To stay fully invested in a bear market, particularly a severe one, means that I have to sell puts further out of the money (basically lower than where the stock is trading) to earn profit while protecting myself from being assigned shares of a stock at too high a valuation. To do this I have to use some method of market timing to establish guidelines where I think stocks are over-valued, fairly valued and under-valued.
Market Timing And Owning Stocks At Fire Sale Prices
I am not interested in owning a great stock at too high a valuation and end up owning the stock for a number of years while waiting for it to decline.
On the other hand, I am always interested in owning a great company at a fire sale price that pays a great dividend and has call premiums that make selling covered calls a practical strategy while waiting for the stock market to recover.
But to know what is a great discount or sale price on a stock means I must use market timing to have some idea about where it would be under-valued and when to step in and begin buying the stock as it falls in value.
Market Timing And Picking The Bottom And Top
Through my market timing system I am never able to pinpoint bottoms or tops in a market. I can however use my market timing to arrive at what I believe to be possible ranges for the market to move within and this allows me to know when to buy stocks or sell puts and at what strike levels to consider. This also allows me to develop strategies such as the cautious bull to take advantage of my market timing outlook.
Market Timing Is Not For Everyone
Market timing is a strategy that I believe is not suited for everyone. I believe market timing should be a strategy that investors develop for themselves using the various tools that they have available, whether it be their brokerage account, newspapers, magazines or on-line services.
I believe it is very important to know when to stop buying stocks, move to cash or sell put options and wait for clear indications as to the next move in a market. The constant buying of a security as it moves higher is a major blunder that investors need to correct to profit from stocks and grow their portfolios.
If developing a personal market timing system can help an investor accomplish this, then market timing is well worth the effort.