My favorite market timing metric

[wabmester]

Market timers, what's your favorite indicator?

I like to watch the spread between market E/P and short-term interest rates.   There are a couple of reasons I like looking at the spread:

1) It makes logical sense.   You're comparing earnings yield to risk-free interest rates.   If the stock market isn't yielding enough to beat the risk-free rate, that seems like a valid reason to worry.

2) Using this indicator has worked in the past.    Yeah, backtesting means nothing to you, I know.   But here's one paper that suggests timing based on the short-term spread not only would have historically increased returns, but also reduced volatility.    Oh, and it's written by a fed economist, which might be good for a warm fuzzy.

Market-Timing Strategies That Worked

Vanguard tells me that the total market P/E is 18.9 today.    That's an E/P yield of 5.29%.

The 90-day T-bill yields 4.68%.    So, the spread is a tiny 0.6%.   Still positive, though.   Keep on your toes when it goes negative (perhaps at the next FOMC meeting).

 

[dusk_to_dawn]

Where is the best place to find the monthly PE ratio of the S&P 500? You can find graphs all day long, but you can't just punch in SPY and get a summary that includes PE ratio. Interesting report.

 

[razztazz]

I am not expert but I have examined most of these market timing strategies at one time or another. In most cases they don't make much money per trade, are too complicated, or there seem to be too many exceptions, or required too many trades, or too much baby-sitting.

My coziest indicator is the good old 200 day moving average. Someone, an olden days market operator, I forget who, once said the big money was in catching the major movements of the market not in the smaller moves which I take as week-to-week/month-to-month.

There's very little to know about using any Moving average. It takes into consideration everything else at one time.

I would appreciate some other little idicator that might get me in a little soon, closer to the real bottom, but that might be getting greedy.

I did a back study some yrs ago compating the50/200DMA crossover. It corolated pretty well with the Dow Theory and a few other well-known and successful timing "schemes"

And I just laugh at people who would laugh at me about ANY kind of market timing. All the data and reliance on history and charts that they deride just happen to be the exact same data and charts they use to glorify Buy and Hold. It's the same chart. It's like Buy vs Rent. Lifestyle issues. What makes one feel comfortable. They both get you to the same place. And I'm not talking about wild and wooly wheeler-dealer stock flipping sht so don't bother to respond with stories of people going broke who didnt buy and hold because over every 75 yr period stocks have always returned .......I'm just keeping an eye open for disaster avoidance

Thank you and good nigt

 

[d]

I too like the S&P E/P vs interest rates ... but use the 10yr treasury as the benchmark.

 

[mathjak107]

better ceck out fabian's success rate and his moving averages....they worked great,,,well that is until they didnt work great.............

 

[razztazz]

better ceck out fabian's success rate and his moving averages....they worked great,,,well that is until they didnt work great.............

I know. So what? I didnt say you should marry soemthing or nail yourself to some cross and throw away the key...to mix several metaphors. By and hold holds no greater hope of success and much more risk of endless failure based on the same data

 

[Nords]

Market timers, what's your favorite indicator?

Gary Smith's "How I Trade For A Living".

Out of all the indicators he discusses, the most valuable nugget I gleaned was "These indicators work great-- until they stop working."

His skill was in figuring out which indicator was working or not.  The good news is that after more than three decades of trading he's largely ER'd.  But I wouldn't want to compare his results to B&H.

One of these days I'm going to sit down and turn Nicolas Darvas' "How I made $2M in the Stock Market" into a stock screener and start working it.

Or I could just keep surfing the south shore for a couple more decades and achieve the same result. Hmmm....

 

[mickeyd]

Market Timing always reminds me of why there is a "Greater Fool theory* floating around.

*Theory of the Greater Fool: “I may be a fool to pay this high a price, but I’ll sell it to a greater fool who will pay even more”

Since fully embracing the EMT and being 100% invested in my perfect 70/30 indexed asset allocation, I seem to get a hell of a lot of sleep each night.

 

[haha]

Market Timing always reminds me of why there is a "Greater Fool theory* floating around.

*Theory of the Greater Fool: “I may be a fool to pay this high a price, but I’ll sell it to a greater fool who will pay even more”

Since fully embracing the EMT and being 100% invested in my perfect 70/30 indexed asset allocation, I seem to get a hell of a lot of sleep each night.

On what date did you begin your perfect allocation?

Seems to be that perfection might be relative to market era.

Ha

 

[razztazz]

Seems to be that perfection might be relative to market era.Ha

IOW, one way or another........... it's ALL market timing.

 

[LOL!]

My favorite market timing metric is the change in the Dow in one day.  Studies show that if you miss the B best days of the market where B = (10, 20, 30, or 40 days) that you get doodly squat returns.  So you stay invested.  But the same studies show that if you miss the W worst days of the market where W = (10, 20, 30, or 40 days) that you make out like a bandit.  Since the bests days and worst days usually occur close together in time, it is very easy to base timing on the worst days.

I simply move some of my cash to equities in the last 15 minutes of trading on those days that the Dow is down more than 1.5%. 

I don't worry about the best days.

 

[Ed_The_Gypsy]

When my sister gets out of the market, I know it is time to get in.

Actually, I am more or less 100% invested in equities at all times. I do not use timing. I have been doing much better than my sister for the past 8 years. So good that I am starting to get twinges of anxiety. 30% a year is kind of like being Burt Munro in his Indian at 200 mph with the wind right in your eyes.

Then I have a beer and stop worrying.

Ed

Short movie review:
"The World's Fastest Indian"--really good movie. They took a few liberties with the facts, but unless you Google Burt Munro, you won't know the difference. Someone who knew Burt said that it was like Anthony Hopkins was channelling ol' Burt.

 

[Spanky]

Here is another method (not mine):

This strategy shifts 50% of total assets between U.S. stocks and cash based on classical market-timing. This is because (a) I keep 30% of total assets in cash-equivalents for various reasons, and (b) I keep 20% of total assets in foreign stocks at all times.

This strategy makes major decisions using the P/E relative to Money Market rates (the PEM indicator). It is defined as the trailing P/E for the S&P500 multiplied by the current MM interest rate. For instance, a P/E of 25 and MM rates of 5 percent gives a PEM of 125. The higher this result is, the higher that stock prices are, relative to earnings and interest rates. Its long-term average value is somewhere between 90 and 95. So a value of 125 indicates that stocks might be overvalued by at least 30%.

1. RED LIGHT STOP: Whenever the PEM rises above 125, I exit the U.S. stock market completely. This is because, under such conditions, I am of the opinion that equities are so dangerous that MY trend-following is more likely than not to come out behind (I am sure that others have more expertise).

2. YELLOW LIGHT CAUTION: When the PEM drops below 110 after a red light, I switch to Trend-Following to shift the entire 50% en masse back-and-forth between U.S. equities and cash. The specific trend indicator I use is based on any good S&P 500 Index fund with reinvestments of dividends (i.e., total return, not price alone) deflated by money-market returns. The strategy is roughly as follows: I exit when this Index drops below its 50-Day Exponential Moving Average; I re-enter when it rises 2% above its 50-Day Exponential Moving Average. This gives a hair-trigger exit and a cautious re-entrance. The 2% wait also reduces whipsaws.

3. GREEN LIGHT GO: When the total return Index rises to 15% above its lowest point since the red light began, or it hits a new 12-month high, I figure the Bear is over and I move en masse to U.S. equities and leave it there until another red light (so I keep 50% of total assets in U.S. stocks, 30% in cash, and 20% in foreign). The only exception would be if the PEM were above 105, in which case I would maintain yellow light status.

4. BLUE LIGHT SPECIAL (stocks are "on sale"): Whenever the PEM drops below 70, I move an additional 20% of total assets from cash to U.S. stocks (so I have 70% total in U.S. stocks, 10% in cash, and 20% in foreign). This is because stocks are so cheap. I go back to a 50/30/20 ratio when the PEM rises above 80.

 

[mathjak107]

as peter lynch one of the greatest money managers said in an interview....
"peter where do you see interest rates going?
"we will see
"peter where do you see stock prices headed this year?"
"we will see...
have you no gut feeling peter?
"if i could correctly predict 3 major turning points in a row successfully i would be a billionaire today"

 

[mathjak107]

I know. So what? I didnt say you should marry soemthing or nail yourself to some cross and throw away the key...to mix several metaphors. By and hold  holds no greater hope of success and much more risk of endless failure based on the same data

depends what you buy and hold...a good mix of index funds linked to the broad markets has never lost money in any 15 year period ever....just going back 12 years duke university did a study and found out of 238 market timing systems using moving averages,technical analysis or both only 12 are left today and only 2 beat the buy and hold market averages...going out 15 years none beat the averages......

works for me

 

[wabmester]

Where is the best place to find the monthly PE ratio of the S&P 500?  You can find graphs all day long, but you can't just punch in SPY and get a summary that includes PE ratio.  Interesting report.

Good question. Most of the fund and ETF sites that offer S&P 500 and Total Market funds will give you the P/E, but they don't tell you how they calculate it. Obviously, you'll get a different number if they use trailing earnings vs forecast earnings, for example. I used Vanguard's numbers.