Market Timing – Weekly Stock Market Strategy – June 2010

Weekly stock market strategy updates that went out to subscribers during June 2010. To receive current weekly update sent to your email, click on the FREE TRIAL link at the top of the page.

Weekly Stock Market Strategy Update 6/5/10

Well my rare but reliable ADX signal is not looking so good. Maybe you were fortunate enough to wait until the final hour of trading on Thursday. If so, you may not have taken the trade. That is usually how I place the trades but since I had back tested this ADX system with a buy stop that is how I placed the trade. Since I suggested this only as a more aggressive trade, hopefully most of you did not take it. I will exit this trade at 104.25 on a stop.

So much for a cascade of buy signals following the ADX buy signal. The buy stop was barely breached on Thursday morning before the selling began. A weak afternoon rally could not even reach the stop level. Friday’s weak employment report was all that was needed to start the sell off. It appears the 104-105 level on the SPY will have to be tested a third time. The more the market sells off the more bullish I am getting. It just becomes a matter of waiting for the market to stabilize and start generating some buy signals. However, just because sentiment has declined and the market has sold off, does not mean we can’t see a prolonged decline.

Weekly Stock Market Strategy Update 6/12/10

The market has found a range that it is comfortable in. Until the SPY has two consecutive closes above 111.50 or below 104.00, it is not entirely possible to no which direction this market will trade in the intermediate term. I think the odds are slightly in favor of a bullish move out of this range. Currently however, it is to early to make a trade based on that assumption. We will have to watch and wait.

Weekly Stock Market Strategy Update 6/20/10

Thursday and Friday the SPY managed to close above 111.50, which I had pegged as resistance. The market is now overbought and looks like it needs to take a breather or sell off a little before it can work its way higher. I have not seen any new buy signals but they could come when the SPY takes out the high of 111.73. There is nothing else to report this week. If signals are generated I will send out a midweek update.

Weekly Stock Market Strategy Update 6/27/10

The SPY traded down Monday thru Thursday. The sell off was a little more than I had anticipated. Now the SPY is oversold and Friday’s consolidating price action indicates that a close above Fridays high could be at least a decent short term buying opportunity. Looking at the charts this week, the possibility of breaking support near 104 on the SPY, needs to be considered. The weekly chart looks as if a Head and Shoulders formation might be in the making. If we do manage multiple closes below support at 104 the target would be around 87. That is quite a sell off from current levels and is by no means what I expect to happen. However since there is such strong support at 104 and the SPY closed near 108, the downside risk is somewhat limited at 4%. If you’re wrong you risked 4%. If you’re right this may be the best buying opportunity for the next three months. This suggestion is based purely on technicals and is not generated by any systems that I watch. For that reason I will not track this as an official buy signal.

Stock Market Timing vs Buy and Hold II

There has been a lot of press lately about the buy and hold philosophy. Based on the name of my site I think you know where I stand. It is also more than a bit ironic that I would quote Ben Graham, but some quotes are timeless. I do believe in the underlying principles outlined in his classic Security Analysis. Somewhere along the line value investing got confused with buy and hold. The confusion probably started when Wall Street still needed to sell stocks when they were not a bargain by any stretch of the imagination. That is probably when people started referring to Warren Buffet as a buy and hold investor. Wrong, he is a value investor that is well aware of the tax ramifications of an actively managed taxable account. Value investing is best suited for your taxable brokerage accounts. Most investors probably lack the time and or dedication that are required to research enough stocks so you can have a well-diversified portfolio. The vast majority of individuals have the bulk of their investments in some type of tax deferred retirement account. That is why my focus here is on market timing in your tax deferred accounts.

All that being said, I have been getting a kick out of the arguments made by long-term buy and holders.

Some of the major defenses of buy and hold have a hint of market timing to them. If you are buying cheap and selling dear is that not a form of market timing. Your indicator du jour might be a P/E ratio instead of a moving average but you are still making a prediction about the future price of an individual stock. The funny thing is you would be hard pressed to find a long term buy and holder that thinks he or she is timing the market. I would venture to guess that they would loathe the thought of trying to time the market.

I also see a lot of people saying that because there is so much talk about buy and hold being dead that is the exact reason it is probably not dead. There may be some truth to this in that it is best to probably zig if everyone else is zagging. However that in it self a form of market timing based on sentiment. I wouldn’t buy something just because it is out of favor. For me I need to see positive fundamentals and good price behavior. I am sure at some point in time, on its way to zero, the sentiment for Enron may have made it look like a good contrary investment.

Professional fund managers can’t seem to beat the market. Well this is true but in their defense how many mutual funds are allowed to be 100% in cash. I would venture to guess not too many. It is not their job to time the market their job is to pick the stocks that will perform best relative to the market. However if the market goes down it will tend to take most stocks with it. Lets not forget the fees associated with investing in mutual funds. From the starting gate mutual funds start out in the whole relative to the overall stock market.

Market Timing is voodoo. I get a kick out of the fact that just because someone wins a noble prize in economics, their theories become widely accepted. Then everyone using that noble prize theory somehow thinks they are smarter than the market. Maybe people feel better if they lose money investing along side a bunch of PhD’s. I for one do not think I am smarter than the market but I will let the market show me the path of least resistance. If and when market timing becomes widely accepted the market will probably be a very different animal.

I am sure there might be something I missed here but I hope you get my point. There are times when the risks associated with being in the market are out weighed by any short-term benefits of being in the market. I think this is one of those times. State budgets across the country are bleeding red. They will have to raise taxes or layoff state workers, neither of which will stimulate the economy. I could see the writing on the wall when the housing market collapsed where I live. I can’t for the life of me understand how so many economist and market analyst couldn’t see this coming. Then they were in a state of denial for the first six months of the downturn. Please don’t expect them to know when this will end either. I don’t claim to know when it will end, but I will say I don’t think it is over yet.

Trend Following System

This Trend Following System is derived from the work of Constance Brown. In her book Technical Analysis for the Trading Professional she discusses RSI trading zones for both bull and bear markets. RSI (Relative Strength Index) is a very popular indicator developed by Welles Wilder. It measures gains vs. losses over a defined period and is traditionally used to signal overbought and oversold markets. The formula can be found on several sites on the web so I won’t go into detail here. What Constance points out in her book is that in a bear market the RSI will not typically trade above 60 and in a bull market the RSI will usually stay above 40.

What I have done with this is applied a 14 period RSI to a weekly chart of the SPY. SPY is ETF of the S&P 500. A long signal is generated when the RSI closes above 60 for the week. We will remain long until the RSI closes below 40 for the week. Signals are generated on Friday and trades were taken at the open on Monday. I realize that in most 401k accounts trades are done on the close. This should not significantly change the results.

Caution: This is a rather large file and may be slow in loading.

SPY CHART W/ RSI Trend Following System

 Trend Following System Trade Dates 

Past performance is not necessarily an indication of future performance. Hypothetical or simulated performance results have certain inherent limitations. See full disclosure on disclosure page.

Market Timing Strategies

As stated in a previous post I will be adding various market timing strategies to this site. I do not think one market timing strategy or one type of system will work in all markets, all the time. For this reason I plan to add market timing systems and strategies in the following categories:

Trend Following System– These Systems will embrace the existing trend of the market and not attempt to predict it.

Interest Rate Model – Is the current interest rate environment favorable to business?

Market Breadth – How broad based is the current move? Are only a few issues leading the market?

Market Sentiment – This is a measure of market or crowd psychology. When these measures reach extremes the market is likely to turn.

Seasonality – Some times of year are better than others to be in the market.

Market Fundamentals – Reference to these numbers will let you know if the market is priced high or low relative to history.

It is my hope that by using multiple systems from these categories we will avoid the risk of betting on one system that may breakdown at certain times.

Stock Market Timing vs Buy and Hold

There is a lot of talk these days about what makes more sense, a buy and hold investment strategy or stock market timing strategy?

Considering the stock market performance over the past ten years, I think the discussion is perfectly reasonable. How smart is it to buy something and forget about it. Is it reasonable to think we can predict what the market, a industry, or a business will look like in ten or twenty years. I think most people, when pressed to really think about it, would realize the absurdity of trying to predict what will happen to a stock in ten years. If you don’t believe me ask anyone who was holding Enron, Worldcom, Fannie Mae, GM, Citigroup or even GE long term.

Wikipedia defines market timing as “the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis.” One of the primary differences between buy and hold and a market timing strategy is the time frame we are trying to predict. A buy and hold strategy by its definition has a much longer time frame than a market timing strategy typically would. A market timing strategy, makes its buy and sell decisions based on changes in the underlying technical indicators or the fundamentals of the market. The time frame of a market timing call based on technical analysis would rarely try to predict what the market is going to do much more than a year out. The farther out we try to predict, the less reliable the prediction. For example it would be relatively easy to predict that a team that makes the NBA finals one year would make the playoff the following year. If you tried to predict who would make the playoffs in ten years, your prediction would probably not be as reliable.

I believe that trying to call the tops and bottoms in the stock market is something best left to day traders and Wall Street professionals. So what about the rest of us? Those of us that would like to retire comfortably without being exposed to market gyrations we have witnessed in the last year. In upcoming post I will be introducing you to market timing models that will help you get better risk adjusted returns than a buy and hold strategy. I hope to do this in a fashion that will not require you to be glued to the markets every move. Most people do not have the time or the inclination to watch the market on a daily basis. That is where I plan to fill the gap by letting you live your life while I keep you updated on changes in the market that require your attention.

Even though I do not try to predict market tops and bottoms, I find myself placed in the realm of market timers. What I do try to do is find times when the risk of being in the market is high and reducing my exposure or tightening my stops. I also look for times when based on historical precedent risk is low and exposure to the market should be increased. I do not want to fight the trend or predict a change in trend. So it is with a certain amount of discomfort that I will sometimes refer to myself as a market timer.