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.

Timing the Market with Best Six Month System

I will be adding trading systems to the site over time. In time I will have several intermediate to long term trading systems that I will follow. I will be following only systems that give fewer than 8 signals per year. Some fund companies limit the number of times you can move into and out of a fund. I do not want the signals given to be constrained by these fund-switching limits. Before you get started be sure you know the limitations and or cost associated with switching funds in your account. Personally I will be using these systems in my 401k accounts and my rollover accounts.

In this post I am adding the “Best Six Months with MACD” strategy. This strategy is covered every year in Stock Traders Almanac written by Jeffrey and Yale Hirsch (http://www.stocktradersalmanac.com). Sy Harding in his book, Riding the Bear, added the MACD indicator to the original “Best Six Months” strategy. He referred to this modified system as the “best mechanical system ever.”

How it Works

The original Best Six Months strategy is quite simple. Buy on November 1 and Sell on May 1. The Best Six Months with MACD is a little different. The dates are adjusted to October 16 and April 20. Two different MACD’s are applied, one for buy signals and one for sell signals. If the buy MACD differential is positive on October 16 we will go long. If the buy MACD differential is negative we will wait for it to turn positive before we go long. When April 20 arrives we will use the sell MACD differential to time our exit. If the sell MACD differential is negative we will sell on April 20. If it is positive we will stay long until it turns negative and then exit our long. I have not gone into a lot of detail regarding what is MACD or its differential? There are plenty of websites that go into greater depth of technical indicators. Check out http://stockcharts.com/school/ for in depth explanation of various technical indicators.

This system just gave its exit long signal on April 21, 2009. The system was down about 15% on the DJIA and down about 13% on the SPY this season. Although this system is far from perfect it was not long during the meltdown that occurred in September and early October 2008.

SPY CHART W/ BEST 6 MONTH SYSTEM