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Market Timing is Not a Joke



September 15, 2011 – Comments (5)

I feel like MF author Rex Moore has picked an opportune time to bash market timing as we are moving higher in the teeth of heavy bearish sentiment. 

I feel strongly that this is one of the most dangerous market's we have seen in the last 20 years.  Lets check back in 1 year on Sept 15, 2012 and see if the bears were wrong about being bearish during the second half of 2011 and first half of 2012. As we speak, Europe is scrambling to prevent a break up of their economic union. The spreading contagion is a natural consequence of trying to unite and hold together several independent and unique economies under one common currency with one interest rate. It was bound to fail.

But back to the main point. I disagree that market timing is a joke. There is a time and place for market timing as a strategy in a portfolio. During times of great uncertainty it is irresponsible to be fully invested in the market all of the time. I don't care how great your individual stocks are. The Coca-Colas and Philip Morris' of the world can tank just as much as poorly run franchises. When there are structural problems in the market individual stocks always display some degree of correlation to the market as a whole. People raise cash during times of fear and bid down even the best companies to move into Treasuries, PM, and cash. (Oct 2008, Now) In troubled times, if you don't want to lighten up on names that sport a competitive advantage, you should atleast lighten up on equity mutual funds or "high beta names," hold some cash, gold, or use a hedge. This is being responsible, not a simpleton.

Now is one such time to avoid a heavily weighted equity allocation with no hedges. As we speak, central banks are trying to preserve liquidity in markets through massive dollar borrowing. In this turbulent environment, you are basically crawling through a mine-field waiting for the grenade to go off if you own a basket of simpleton names.

In a sideways market, like we have had for the past 20 years I contend you could have made just as much using a simple moving average to protect your gains/cut your losses and outperform a basket of top dividend payers. All you had to do was buy a S&P 500 index fund on any break above the 200 ma in the SPX and sell on any break below the 200 ma in the SPX. If you didnt want to sell out of your whole position you could protect your gains by hedging atleast 25-50% of your portfolio with cash, treasuries, put options..etc. Right now we are below the 200 ma on the SPX. Having a hedge on is a must. Only If the S&P 500 breaks above the 200 ma of 1283 would I be a buyer.

I have done some market timing based on the news cycle with favorable results in August.

September has no been as successful but the month is only half over and a 3-4%% underperformance this week does not defeat my thesis. The strategy is still outperforming the market by 5-6% since 8/1.  We still have structural problems in Europe and a SPX below its 200 ma, reason enough to employ hedging, big cash positions, some gold, and a smaller equity allocation.

5 Comments – Post Your Own

#1) On September 15, 2011 at 11:26 PM, totallyoblivious (< 20) wrote:

Well said.  The biggest flaw of this service is the perpetual insistence that there is only 1 way to invest, and that way does not involve any technical analysis whatsoever.  It's true that no one can time the market perfectly, but on average you can certainly time it better by applying some technical analysis to your purchases, and I find it hard to take most articles on this site seriously when they act as though charts don't exist. 

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#2) On September 16, 2011 at 2:20 AM, PostScience (97.90) wrote:

Why use a 200 day moving average? Why not a 199 day moving average, or a 124 day moving average?

Backtest the data, and find the exact moving average that works the best.  Or not.  Because I have.  And there is no strategy using moving averages that beats the market.  If there was, everyone would do it, and it wouldn't work anymore.

Any amature practitioner of technical analysis is going to get SLAUGHTERED by the quants.  Unless you have a PHD in math and comp sci, that is. :)





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#3) On September 16, 2011 at 10:00 AM, RallyCry (32.83) wrote:

Since 2000, with the support of this article  I believe following the 200 ma strategy on the S&P 500 would have netted a return of roughly 250% if you could capture the move up and down in the index.

To look at an even smaller sample DXSSX is an inverse ETF of SPX started in 2006. This product netted roughly 150% returns from late 2007 to late 2008 if you bought when it broke above its 200 ma.  Buying put options on the SPY with reasonable time value of roughly 6 months on the index could achieve an even bigger positive return.

At the very worst, if you only bought and sold the SPX based on moves above and below the 200 ma you could have avoided 2 losses north of 50%. The S&P 500 was down 19% from 1498 in 2000 to 1214 today if you bought and held without dividends. To miss the swings in between substantially hurts your overall performance.

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#4) On September 17, 2011 at 5:55 PM, CNBCsucks (< 20) wrote:

Boosting gains through timing is tough because of the transaction fees and the whipsaws, but RallyCry has a a point - using a tming signal to decide when to put a hedge on is a safety first strategy.  Personally, I use the 80 week MA on the SPX.  The idea is not necessarily to try to make huge gains in a declining market, it's to protect yourself from a huge loss.  Before you criticize, just look at a ten year chart and see where that would have taken you in and out.

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#5) On September 19, 2011 at 9:49 AM, RallyCry (32.83) wrote:

CNBCsucks I like your methodology. Am I correct in assuming you 80 week MA is the same as a 400 day MA? (Basically a year and a half moving average) It points nicely to some muti-year rallies and drops.

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