Market Timing Strategy

[keeleyxt]

I do admit to market timing microsoft stock around earnings. Buy about 3 weeks before earnings, sell the day of earnings. Have done this for a profit about 10 times...eventually it will stop working I guess.

How was the experience during their Skype acquisition

 

[rayvt]

When I see systems that depend on a moving average, I generally wonder why that specific moving average period was chosen. 200 days is a typical moving average used by "technical analysts." Why 200 days? Why not 180 days, or one year?

I'm glad you asked. I just ran across this today.
Briefly: there's nothing magic about 200 days. There's a broad range from 100 days to 225 days that work petty good. (The first row is the plain "today vs. the average". The other rows are for other short-term intervals, of which 50/200 is the most commonly touted.)

The Golden Cross and Other Lookbacks « MarketSci Blog

 

[easysurfer]

Stocks see worst day in 8 weeks today...

http://www.usatoday.com/money/markets/2011-07-27-stockswednesday_n.htm

Hmmm..awfully quiet here for a market timing strategy thread...

 

[Lsbcal]

Stocks see worst day in 8 weeks today...

Stocks down again; Dow drops 1.6% as debt deadline looms - USATODAY.com

Hmmm..awfully quiet here for a market timing strategy thread...

It's suppose to be quiet. I'm aiming for 1 trade every 4 years or so.
Otherwise, buy-hold. Timing doesn't have to mean hyperactive trading and so you still get some unpleasant drawdowns and there is pain .

 

[samclem]

Stocks see worst day in 8 weeks today...

Stocks down again; Dow drops 1.6% as debt deadline looms - USATODAY.com

Hmmm..awfully quiet here for a market timing strategy thread...

Not to worry . . . .GaryInCO's got a system that tells us when to worry. It's bullish.

Just ragging you a bit Gary. No system's gonna correctly call every bump or even enough of them, in time, to make a difference.

 

[Aeowyn]

The bulk of my investments are buy and hold. But there seems to be a lot of fear in the market right now over the US debt issue... I moved moved $1K from cash into stock funds. If the market continues to be scared, I'll continue to move my "opportunity money" into the market.

When the market is happy again (most likely either because something actually gets settled on the debt issue or because Aug 2 comes with no debt ceiling increase and it doesn't turn out to be as catastrophic as thought), then I'll move some money out of the market and back into my opportunity bucket.

It really wasn't that long ago the market seemed happy - seemingly un-phased by the US debt issue. Just last Friday I moved some money from a fund I want to reduce my exposure to - to my opportunity fund. That fund was within 1% of its high for the year when I sold and has since dropped over 3%.

 

[GaryInCO]

In case anyone is wondering: the timing system I described looks at the market only once a month. As of the end of July it was still well above the 12-month average -- clearly still in bull mode.

After the carnage of the last two weeks, the market has moved well below the average. But even if this was the end of the month -- which it's not -- the system would still be in bull mode. The HIGH of the month has to be below the average to switch to bear mode, and the high of August is above the average, so the system cannot switch to bear mode at the end of August. If the market went sideways or down from here, then it would probably switch to bear at the end of September.

 

[Lsbcal]

I think the 200 day moving average for the SP500 has been crossed. That system is notorious for whipsaws.

We are seeing the risk in the Equity Risk Premium -- and it's no fun.

 

[slazenger]

Generally speaking, I find most B&H (w or w/o rebalancing) vs. "market timing" debates on the net confusing, because most will usually defend the B&H side yet, in practice, they market time.

The average person who claims to be a B/H usually has a siginficantly different asset allocation than he/she did just 3 years ago. And I'm not talking about any sort of mild "age adjustment" like 1%/year for age. In short, many will talk-the-talk, but few walk-the-walk.

What's happening right now with the markets will provide a great example of my point. Within the next 2-3 months, probably a very significant percentage of claimed "B&H'ers" will reallocate their asset allocation with a more than 10% change in stock/bond/cash equivalents one way or the other. And that would be market timing.

So Gary, they seem to be mostly against you if you go by the words, but if you go by the actions, don't feel so bad. You're most certainly in the majority, I promise you. Now to be clear, I don't mean that they use your particular moving average scheme, or whatever that is your selling, but I'm just referring to the common practice of making statistically significant adjustments to one's asset allocation at least once per 5 years, for example.

Don't get me wrong, though. I actually endorse long-term timing that takes into consideration the world climate and market valuation tools, and making mild-to-moderate asset allocation adjustments based on those. So does well respected asset allocators such as Bernstein (source: The Investor's Manifesto). So I'm not pointing fingers. Rather, I'm just being in the minority that admits I make portfolio adjustments from time-to-time and am aware that disqualifies me from being a true B&H.

 

[DblDoc]

Generally speaking, I find most B&H (w or w/o rebalancing) vs. "market timing" debates on the net confusing, because most will usually defend the B&H side yet, in practice, they market time.

That's because B&H and rebalance is simple, but not easy. We tend to be our own worst enemies when it comes to investing. While I admit my own anecdotal experience mimics yours it is still, after all, anecdotal. There was a thread on Bogleheads that queried where had all the BH advocates gone as so many "BH is dead", "This time it's different", and market timing threads were posted during the height of the crash. The upshot was essentially they were still there - but weary of posting the mantra day after day.

DD

 

[REWahoo]

There was a thread on Bogleheads that queried where had all the BH advocates gone as so many "BH is dead", "This time it's different", and market timing threads were posted during the height of the crash. The upshot was essentially they were still there - but weary of posting the mantra day after day.

DD

+1

I've not had a warm reception when suggesting everyone stay calm in the midst of a market sell-off - even when I'm only speaking to myself in the mirror.

 

[slazenger]

That's because B&H and rebalance is simple, but not easy. We tend to be our own worst enemies when it comes to investing. While I admit my own anecdotal experience mimics yours it is still, after all, anecdotal. There was a thread on Bogleheads that queried where had all the BH advocates gone as so many "BH is dead", "This time it's different", and market timing threads were posted during the height of the crash. The upshot was essentially they were still there - but weary of posting the mantra day after day.

Woah, I think you overlooked the part where I said most would say they are B&H. If you add up the number of B&H in this thread, they are clearly in the majority.

My point was, if you were to judge by actual investment actions, most would be market timers, at least based on the way I defined it. I just by action and observation, not by words. And I personally believe my observations ARE representative of what people do. So if you feel your similar observations are merely anecdotal, then you're entitled to, but I don't agree with that.

One would have to go digging through other threads to find some of these B&H posters' asset allocation adjustments. I don't have that much time on me.

 

[DblDoc]

And I personally believe my observations ARE representative of what people do.

And with that you get iggyized...

DD

 

[ERD50]

This is interesting, but based on some of my own studies, and my 'gut feel', I can't help but think that any back-tested system is just data mining.

I'm pretty sure that if you gave a programmer a chart of past results of red, black, and green on a roulette wheel, they could pull out some 'winning' algorithms that would fit that data set. It would be unlikely to be worth anything for future spins of the wheel.

-ERD50

 

[Nords]

The average person who claims to be a B/H usually has a siginficantly different asset allocation than he/she did just 3 years ago. And I'm not talking about any sort of mild "age adjustment" like 1%/year for age. In short, many will talk-the-talk, but few walk-the-walk.

I wonder how many would like to be B&H, but there's too many new products (especially sector funds or fixed-payout funds) or people find out that their comfort zones aren't working.

After nine years of ER, spouse and I are just settling into an asset-allocation comfort zone. We passed through a lot of iterations to get there, too. We would never have had the time (let alone the interest or initiative) to figure this out during our working years.

 

[Lsbcal]

...(snip)
I'm pretty sure that if you gave a programmer a chart of past results of red, black, and green on a roulette wheel, they could pull out some 'winning' algorithms that would fit that data set. It would be unlikely to be worth anything for future spins of the wheel.

-ERD50

I've thought a lot about this and looked at a lot of data. The world economy is more complex then that little ball in the roulette wheel. With the roulette wheel we can basically calculate the odds, so the analogy with the economy breaks down.

One way to tackle this is to compare financial instruments and make bets (we like to call these investments because we are rational creatures ) based on their relative attractiveness versus past historical data. Like comparing stock & bond returns, yield curve steepness, etc. Then you can use some momentum measures to avoid only some declining markets. The bear markets you can avoid are those that slowly deteriorate. The fast decliners like the Oct 1987 crash or the 1998 LTCM panic just become painful buy-hold periods.

Will this be a sharp declining panic or a slow rolloff type decline like in the last 2 bad markets of the last decade? I don't know that but will watch the trend on a monthly basis.

 

[ERD50]

Originally Posted by ERD50

I'm pretty sure that if you gave a programmer a chart of past results of red, black, and green on a roulette wheel, they could pull out some 'winning' algorithms that would fit that data set. It would be unlikely to be worth anything for future spins of the wheel.

-ERD50

I've thought a lot about this and looked at a lot of data. The world economy is more complex then that little ball in the roulette wheel. With the roulette wheel we can basically calculate the odds, so the analogy with the economy breaks down.

True, they are different. But my point was that in any data set, one will find patterns if they look hard enough. Do those patterns have any predictive value, or is it just co-incidence?

So does the approach mentioned in this thread really have predictive value, or is it just a back test which found patterns in the past data set? I don't know, but I've seen so much of the latter that I remain skeptical.

edit/add:

The fast decliners like the Oct 1987 crash or the 1998 LTCM panic just become painful buy-hold periods.

Painful for B&H? The market was up for 1987 (6%) and 1998 (29%). If I could get the average of those going forward, then call me a masochist! Bring on THAT kind of pain! What would have happened if one tried to side-step those? They'd probably miss a run up.

-ERD50

 

[Bestwifeever]

In case anyone is wondering: the timing system I described looks at the market only once a month. As of the end of July it was still well above the 12-month average -- clearly still in bull mode.

After the carnage of the last two weeks, the market has moved well below the average. But even if this was the end of the month -- which it's not -- the system would still be in bull mode. The HIGH of the month has to be below the average to switch to bear mode, and the high of August is above the average, so the system cannot switch to bear mode at the end of August. If the market went sideways or down from here, then it would probably switch to bear at the end of September.

So where are you putting your investments?

 

[HatePayingTaxes]

Slazenger - B&H here and I do admit that I market time. However, to what degree is the question. Currently, I'm at 90/10 (equity/bond) allocation b/c I believe, in the big picture scheme of things, equities will go up. When Dow reaches 2007 high, I might move to 80/20 allocation. Yes, I'm shifting my portfolio based on the market but I don't consider myself true market timer. If I'm shifting 50% of my portfolio based on show SPY is doing... heck even 30%... I would consider that a true market timer and I don't think majority of the board members are like this. So to say that Gary's in the majority, I disagree with you. Actually, I don't know if Gary's the 30%-50% in and out guy but that's the feeling I'm getting.

For some people, it takes good and bad times to know your true comfort level but this is not market timing. It's just finding out about yourself.

 

[utrecht]

OK, market timers. Here you go:
News Headlines

Time to buy.

 

[Lsbcal]

True, they are different. But my point was that in any data set, one will find patterns if they look hard enough. Do those patterns have any predictive value, or is it just co-incidence?

So does the approach mentioned in this thread really have predictive value, or is it just a back test which found patterns in the past data set? I don't know, but I've seen so much of the latter that I remain skeptical.

I agree that filters are not predictive. My feeling, which I cannot mathematically prove, is that they move you in the direction of the current momentum vector. As I understand it there has been some research on momentum by academia and it apparently exists. But is it exploitable? That momentum vector can change from month to month (I look at end of month data).

Again, one should design the filter with some reasonably sane criteria. Shoot for low frequency of trades and accept the Buy-hold default on very sharp market declines. It is nice to beat the market, but these techniques should be viewed primarily as risk reduction ones.

Painful for B&H? The market was up for 1987 (6%) and 1998 (29%). If I could get the average of those going forward, then call me a masochist! Bring on THAT kind of pain! What would have happened if one tried to side-step those? They'd probably miss a run up.

-ERD50

I'm assuming you went through those markets. I did and it was painful and scary too. Those did turn out to be rewarding for those years. What I was saying is that the methodology I would design would have you hold throughout those types of declines. It would not try to side step those extremely sharp drops.

The most well publicized methods like the 200 day moving average might have got you out in the 1987 crash (barely), but that method did not do well in the 1990's. See Siegel's analysis in Stocks for the Long Run.

I've done one study to look at the 1929, 1987 and current market (including inflation and dividends). The chart shows that the market movements were indistinguishable for many months. The 1929 initial drop was very sharp (they allowed extreme leveraging back then). The 1987 drop was also just about as extreme.

BTW, the last 10 trading days (2 weeks) was the 5th worst isolated drop since 1950.

I'll post that chart in a followup.

 

[Lsbcal]

Comparing some market declines. The peaks are lined up so the 1929, 1987 and 2007 peaks are coincident. Each dot on a colored line represents 1 month. The X-axis is for the 1929 decline line.

Notice how 1987 decline was pretty indistinguishable from 1929 decline until many months into the decline. Yet the outcomes were quite different. There was no major business decline in 1987.

This chart is not intended to predict anything moving forward in time. Just trying to show how difficult it is to separate the wheat from the chaff.

 

[BigNick]

OK, market timers. Here you go:
News Headlines

Time to buy.

Wow. Can there be a bigger example of BS than a system in which the decision to enter a market is dependent only on the internal history of that market ?

Specifically, if the whole market is overvalued by 300%, following that system will have you piling in when, after 200 days of steady dropping, it's only overvalued by 250%.

Of course, if enough people believe in it, then it may serve to create a bubble to allow some people to recover some of their losses, if they cashed in. But it doesn't tell us anything about the long term. (Frankly, I don't think that any market timing tealeaf analysis tells us anything, and certainly not beyond the end of the current week.)

 

[utrecht]

The guy didnt claim that the signal meant anything long term. He said the market would be higher both 2 weeks later and 3 months later. The last time this signal was hit was March 2, 2009 and the market bottomed 4 days later. If you happen to be someone who looks at market signals to do any short term trading, this might be of interest.

 

[GaryInCO]

So where are you putting your investments?

Sorry, haven't been in for a while. I still have most of my money in stocks, though there's a lot of mining stocks, GLD, etc in there. I bought some SDS (-2x S&P500) about 10 days ago just as a hedge, and that's done a fabulous job of driving the market up.

For anyone interested: as I said before, the end-of-August signal couldn't switch to short because August started above the 12-month average. However so far the September bar is WELL below the average, which sits at about 127.50. SPY is currently at 117.85. So unless SPY increases at least 127.50/117.85 = 8%+ from here during September, the September bar will be entirely below the average -- and that would flip it into "bear" mode.