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The Market Timing Approach: A Guide to the Various Strategies

by Joseph Ludwig

With technical analysis enjoying a renaissance on Wall Street, can market timing—which is firmly rooted in technical analysis—be far behind?

Over the past few years the application of market timing by individual investors, as well as registered investment advisers, has accelerated rapidly. Contributing to the growth of timing has been the proliferation of computer capabilities, the availability of data, and the growth of mutual funds.

Market timers believe that it is possible to identify market trends early enough at their start to successfully position investments in equity, bond, or money market funds. Buy-and-hold advocates argue against this approach, maintaining that it is not possible to successfully time the market on a continuing basis. Many articles on market timing—including those in the AAII Journal—tend to focus on the debate between market timers and buy-and-holders. What gets lost is any detailed discussion of market timing itself—what it is and what the primary strategies are.

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Discussion

George Macdonald from Pennsylvania posted about 1 year ago:

I find it amazing that so many people disparage market timing. Yet, virtually every time they decide to buy or sell, they are making decisions that the price will either go up or down -- and that is market timing.

"Buy Low" & "Sell High" is another name for market timing. You don't have to be shooting the highest high or the lowest low -- just trying to get somewhere close is still market timing.


John m Welford from Illinois posted about 1 year ago:

I believe there are two aspects to Market Timing,not just the Technical Aspect.

First,the Fundamental aspect,(Index PE,PBV,PSR,Govt Bond Yields/Earning Yields etc etc and others) compared with historical Fundamentals.

Secondly, Sentiment and Technical short term indicators (VIX, AAII sentiment Indicators,RSI, MACD and others).

When both indicators are too high, we have the imminent probability of a full blown bear market, or too low, the imminent start of a new vigorous bull market.

When only the Technical indicators show up too high, it usually foretells a correction in an ongoing bull market, or too low, a temporary upswing in an ongoing bear market.

I categorise all these indicators in terms of a percentage position up from a theoretical bottom based on historical levels. When both indicators exceed 80% a serious bear market is imminent,when below 10% the start of a new bull market is due.

In early March 2009 a nadir of 2% was reached in both indicators,following an earlier extreme high of over 85% in both during late September 2007. Both proved accurate and worked wonders for my Investment Results.

The S&P 500 is now at 52% (Fundamentals) and 57% (Sentiment) so Market rises are still to come.


Hitesh Patel from Pennsylvania posted about 1 year ago:

Hi John,
I do agree on Dual Aspect view
Do you mind explaining more about your system and in practice how do you track all that on a regular basis.
Thanks


Howard Wetzel from Virginia posted 3 months ago:

It would be interesting to hear from John Welford again, now that the equity markets have risen so much in the last 10 months. What kind of numbers are your Fundamental and Sentiment indicators showing now?

Thanks.


Paul Yoder from Michigan posted 3 months ago:

I have used the 200 day average of a selected group of mutual funds with a confirming indicator of the 200 day average of the Wilshire 5000 (Dow Jones Industrials in earlier years). When these averages are above the 200 day average I was fully invested and when they went below the 200 day average I was in cash. Since 1986 I have avoided all major market melt downs and got back into the market after the trend turned up. I did have a few minor whipsaws during the 90's but the long term results were excellent.


David Woolley from Virginia posted 3 months ago:

I've had some luck using William O'Neil's "How to Make Money in Stocks" for picking market bottoms, but haven't found a good way to pick market tops. I do believe in the presidential election cycles contained in the "Stock Trader's Almanac". Based on this, I was surprised by how strong last year (2013) was since it was a post election year. Thus, I sat with too much cash. Basically I believe in technical analysis over the opinions of Wall Street "experts".


Richard Abbott from Florida posted 3 months ago:

I am 83 years old and I have using asset allocation for the past 20 years and it has fortunately worked well for me. I have averaged 9% a year over the past 20 years. I take 112 minus my age in conservative balanced mutual funds, the rest in short to intermediate mutual fund bond funds and one year in cash equivalents. When the market was down to 6400 in 2008 I did nothing - no selling and no buying. My portfolio was down 27% in 2008 and now I am up 175% since February, 2009 - a "happy" camper.


Richard Abbott from Florida posted 3 months ago:

I am 83 years old and I have using asset allocation for the past 20 years and it has fortunately worked well for me. I have averaged 9% a year over the past 20 years. I take 112 minus my age in conservative balanced mutual funds, the rest in short to intermediate mutual fund bond funds and one year in cash equivalents. When the market was down to 6400 in 2008 I did nothing - no selling and no buying. My portfolio was down 27% in 2008 and now I am up 175% since February, 2009 - a "happy" camper.


Al Pryka from Michigan posted 3 months ago:


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