Market timing and market direction are the most important tool in my investing tool-chest. Nothing comes closer. My market timing and market direction call on Thursday Oct 20 in the evening entitled VIX MAY BE WARNING discussed my outlook for Friday for October options expiry and my general look at the trend in the market.
I received a number of emails from readers and there were a couple of comments on the blog as well wondering why I bother with market timing and market direction. After all, on Friday I was looking for the market to pullback, and instead it gained 2%. So why bother?
The answer, in a word is confidence. Confidence in the overall trend which gives me confidence in my trades.
Market Timing / Market Direction – CONFIDENCE IS KEY
I will be the first to admit market timing is not rocket science and market direction calls are just a general understanding of economic, social and political events couple with technical chart analysis.
Therefore while I may not be able to pinpoint a swing here and there in a day or even over many days, it is the overall trend that is important. Through market timing I gain knowledge about trends. Through technical analysis I can apply that trend to determine what I believe to be market direction.
Combined then, my market timing and market direction outlook give me that confidence which allows me to make the daily trade decisions to sell options in any kind of market. Without that confidence in the overall trend I am basically trading my positions blindfolded. In that event I may as well pick my strike prices to sell options by throwing darts at a stock chart.
At the beginning of the year I looked at all the technical indicators and wrote that I believe the market direction would be more bearish than bullish for 2011. As to market timing I looked at all the economic, social and political events and indicated in my article dance near the exit, that June would probably mark the end of the most recent bullish phased of the market.
Therefore based on my market direction and my market timing outlook I indicated in January 2011 that my financial investment strategy for the year would be the Cautious Bull. I have referred to this strategy throughout the year in many trades and articles.
My strategy then for the entire year was based on my market timing, JUNE 2011 and my market direction – bearishness. So if I get some days or even weeks wrong I apologize, but to repeat myself, the overall trend is important and which gives me the confidence in which strike puts and stocks to sell options against.
Market Timing / Market Direction – BULL VS BEAR
If the market direction and market timing was a bull market such as in much of 2009 and 2010, I can safely sell at the money puts and even in the money puts. In a bull market, making money is easy as most stocks follow the market direction trend and even the laggards will grudgingly move up even if only a few percentages. If the market timing and market direction are clear selling options is simple but not as profitable as when markets are volatile. The volatility is what drives option premiums.
But market timing by studying the overall economy, social and political events must still be done even in a bull market to attempt to pinpoint when those conditions may change. Likewise studying the technical charts to keep an eye on market direction is imperative as any change in the overall market direction needs to be spotted to continue to successfully profit from selling options. Market timing as to when that change may occur becomes crucial to knowing how close to at the money strikes to consider selling.
Market Timing / Market Direction – STILL A BEAR MARKET
Bear Markets Lumber Along. Real Collapses Are Not Common Events But Investors Have Long Memories.
Until the market recovers and holds above 1270 on the S&P, the bear market is in charge. We have been in a bear market probably since May or June. But investors fail to understand that bear markets are not just straight down. They amble along with great rallies and pullbacks. Not all bear markets end with a crash. Crashes are rare events over the past 100 years in stocks and without a doubt they were all buying opportunities.
At the same time when the market direction is unclear and moves sideways, investors eventually get tired and frustrated. They see every rally as the end of the bear market and every plummet as signs the bear market is going to get worst. Crashes like that of 2008-09 have very long shadows. Investors fret and worry that another crash or “the second shoe to drop” scenario is just around the corner.
This is far from the truth, but it is that fear which makes investors sell in a downturn such as Oct 4 2011 and August 8 2011 as they remember October 2008 or March 2009. Then as the market seems to recover such as we have seen from Oct 4, investors fret even more, because they sold out, took loses and now think they were wrong. Eventually they will jump back in when they believe the market direction has change to a bull market and often find that it was a bear market rally, they bought at the top and now they have more losses again.
Select this market timing link to read about the financial crisis and market collapse of 1907.
Market Timing / Market Direction – PROFIT BY THE CALL
Market timing is far from a science. There are investors who believe in everything from moon cycles to Elliot wave. But my market timing calls have served me well over more than 30 years and having an understanding of the general market direction has profited me handsomely. While throughout the June, July, August, Sept and much of the October period I have remained bearish, this has not kept me from investing. Far from it. My bearish call though has prevented me from selling options that would certainly have all ended up in the money and possibly taken me many months to recover from.
Instead my market timing and market direction calls which cannot always be correct, has allowed me to be on the right side of the market since January and profited very well from it.
Market Timing / Market Direction – IT’S NECESSARY
To close it is important to realize that it is the overall trend that is important and by posting daily outlooks and my best guess, I am building toward the ongoing consensus of where I think the market is heading and how I will profit next from it.