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Frank started market timing in 1982 when the Federal Reserve cut interest rates and sparked the 1980’s bull rally. Realizing that this rally could have been forecasted, he began to search for indicators which had similar forecasting ability. Within a year, his first newsletter was launched,... More
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  • Sector Timing For Conservative Market Timers

    The current markets are as volatile as any seen since the 2008 bear market chopped more than 50% off the major indexes. We may not have a bear market in our immediate future, but knowing that individual sectors will exit in time to protect us is important.

    Volatility is great if it is within a trend, and it often precedes a new trend, causing unnecessary anxiety in inexperienced market timers. But volatility is also needed to profit, something that many market timers forget.

    There is one strategy that is hardly affected by the volatility, and it is also quite profitable, year after year. For those who are conservative market timers, we suggest the Fibtimer Sector Timer.

    Trading the Sectors

    How does a market timer take advantage of volatility, while protecting himself or herself from the very real risks such volatility creates?

    The answer is by trading the sector funds. Here is a "quick" list of reasons why:

    1. Diversification: By having small positions in multiple industries, you reduce exposure to any single industry being affected by a negative news event.

    2. Volatility: While individual sectors are no less volatile than the rest of the market, they do not move together. So the volatility to one's portfolio is considerably reduced.

    3. Drawdowns: Because sector funds go to cash during sell signals, and because there are always some funds in bull markets at the same time there are others in bear markets (during which those sectors are protected in money market funds), drawdowns are kept to a minimum.

    4. Good in All Markets: There are always single industries in their own bull markets. Even during a cyclical bear market, such as we experienced during 2008, there were always some industries moving higher. And if not, you are still protected by being in money market funds.

    5. Active Timing: Though sector timing is not aggressive, it is certainly active. You will always be trading the bullish sectors, and exiting the under performing ones. In some respects, it is the equivalent of running your own well managed mutual fund.

    6. Trends: Industry sectors tend to trend. And when they trend, they often move further (in either direction) than anyone expects. During a strong bull run, it is common to find individual sectors that double the gains of the overall market.

    Winning The Battle

    The Fibtimer Sector Timer strategy covers 16 industry specific sector funds found in the Rydex Fund Family. Several other widely used fund families also have sector funds, including Pro Funds and Fidelity Funds which can be used with our sector timing signals.

    Even in volatile market conditions the Sector Timer strategy performs exceptionally well. This is proactive money management at its best. Constantly putting your money in the strongest sectors while removing it from the weakest sectors during down trends.

    This is where the diversity inherent in sector timing stands out. Top performing sectors are where your timing funds are allocated, and no one sector can cause irretrievable damage to the portfolio should that industry collapse without warning.

    But most importantly, as a portfolio strategy, sector timing has been winning the battle against a stock market that has gained little in the past ten years for buy-and-hold investors.

    Conclusion

    Over the years, sector fund timing may go down as the "best conservative strategy" because of its ability to target funds into "only" those industry sectors which are performing well.

    The low drawdowns, low volatility and diversification inherent in sector timing, not to mention strong profitability, cause this strategy to stand out from all the others.

    In volatile market conditions sector timing can create profits while other traders are watching their capital evaporate.

    While sector timing may not make huge gains during cyclical bear markets, being mostly in cash, the strategy will protect your investment capital. And it will then perform well during bull markets, always keeping you invested in those industries that are in their own bull markets.

    Caveat... sector timing does require active participation. Perhaps we should say it is for "active conservative market timers." The FibTimer Sector Timer often makes several changes each month though the number of changes is much smaller during bull or bear markets when trends are strong.

    Sector timing also requires a minimum account size. Remember, there "could" be as many as 16 open positions at any one time, and closed (bearish) positions should be in cash (money market funds) with those funds remaining untouched. A good guess is that a sector timing portfolio should be at least $25,000 to start.

    A new market timer could select seven or eight of the major sectors and create a smaller portfolio. For example; Consumer Products, Energy, Financial Services, Health Care, Leisure, Retailing, Technology and Utilities.

    The FibTimer Sector Timer only requires a couple of minutes a day to check for and make changes if they are needed. And we email those changes every evening to subscribers.

    Apr 03 5:10 PM | Link | Comment!
  • Instincts Vs. Market Timing Strategy

    Humans are born with basic instincts for survival. They need to protect themselves at all costs.

    Certain critical instincts are inborn, such as hunger, self-survival, etc. But humans are complex creatures. We also have learned instincts, habitual ways of behaving that are so automatic and unconscious that they seem as if they are part of our very fabric.

    Acting Without Thinking Logically

    For example, as you drive in traffic, you "instinctively" slow down or change lanes when the car in front of you seems to be driving erratically.

    You may have noticed that many drivers will make the lane change to avoid slowing down, and will even speed up to pass to take advantage of everyone else slowing down.

    People react instinctively. Some act without thinking logically about their options, without taking steps to avoid possible danger. They often tend to make poor decisions.

    Behavioral economists have demonstrated that people also make automatic, unconscious decisions when trading the markets.

    Most people are extremely risk averse. They enjoy the pleasure of a sure win, even a small one, but try to avoid the pain of losses at all costs. Yet there is no logical reason to show such an asymmetry regarding their decision making.

    Investors also sell their winning trades prematurely so they can lock in their profits.

    These unconscious and automatic decisions reflect a strong and universal human desire to avoid risk.

    At FibTimer, all of our strategies are non-discretionary. Emotions do not play a part in our buy or sell decisions. Our strategies offer disciplined execution of non-emotional buy and sell signals.

    The reason for following any timing strategy is to remove yourself from making emotional trades. To remove yourself from the herd, which is often headed in the wrong direction.

    Towards the nearest cliff.

    Playing It Safe

    As humans socially evolved, they learned to protect their survival by playing it safe.

    Playing it safe may be prudent for very long-term investors, but for shorter-term investors... those who are unhappy with the losses incurred during numerous inevitable downtrends and who wish to avoid those losses or to capitalize on the downtrends, fear of risk and uncertainty is an impediment to success.

    It is necessary to identify this need for safety and security and "reprogram" yourself to work around it.

    Following The Masses

    A common illustration of risk aversion happens when market participants follow the masses, as if they are wild animals banding together as a herd for protection.

    They look toward others for direction, regardless of the consequences.

    During a typical market correction, investors increase their selling the lower the market goes, with huge numbers of them selling near the bottom. The same thing happens in every decline.

    As more and more people see prices drop, more and more participants sell. It is scary to see your investment values plummet.

    Is the news going to get worse? Will the prices reach even lower lows?

    Most people are afraid of pain. They are afraid that the price may go even lower, and they sell because they don't want to lose even more money.

    Of course not all investors will sell. Some will become so panicked that they will be afraid to acknowledge their losses and want to leave them on paper, hoping that the prices will return to previous levels in the coming weeks. During a bear market this can be an even worse decision.

    The masses try to avoid risk and pain, and by doing so, they tend to behave automatically. Repeating the same actions time after time.

    Devoid Of Emotions

    Experienced market timers, in contrast, react more decisively.

    They carefully follow a trading strategy that is completely devoid of emotions. They follow through on buy and sell signals with absolute precision.

    They know that any one or more buy or sell signals may be wrong, but they realize that to trade profitably they must learn to trust their timing strategy and act on it. Only over time are substantial profits realized, and only by those market timers who stay the course.

    Think Outside The Box

    If you want to be a winning market timer, you must learn to identify your need to follow the masses, and teach yourself to avoid doing what your need for security compels you to do.

    You must reprogram yourself to think outside the box. Rather than follow the masses, you must follow your timing strategy, which may be contrary to what most people would do.

    Over time, and with extensive experience, you will develop the skills that will allow you to trade decisively.

    Once you have reprogrammed your behaviors, you will not be tempted to follow the masses, but will instead recognize these feelings for what they are. Instincts for survival, which may work in the physical world, are likely to cause poor decisions and loss of capital in the financial world.

    Rather than following the masses, you must learn to follow a timing plan, which is not affected by the emotions of the masses.

    The more decisively you can follow the timing strategy, the more profits you'll realize.

    Mar 27 2:25 PM | Link | Comment!
  • Investor Or Trader... Which Are You?

    Most market participants consider themselves to be "investors." But if you look at a list of the really big winners on Wall Street, you will see that most of those who make big profits, list themselves as "traders."

    By "big profits" we mean doing better than the S&P 500 Index or Nasdaq 100 Index by a substantial margin over any three-year period.

    Investors

    "Investors" put their money into stocks, real estate, etc., under the assumption that over time, the underlying investment will increase in value, and the investment will be profitable.

    Typically, investors do not have a plan for what to do if the investment decreases in value. They hold onto the investment in hopes it will bounce back and again become a winner.

    Investors anticipate declining markets with fear and anxiety, but unfortunately, they usually do not plan ahead of time how they will respond to them. When faced with a declining (bear) market, they hold their positions and continue to lose.

    We all know investors. In many cases it was us before we realized how dangerous buy-and-hold investing could be to our savings.

    Investors often have some knowledge of trading. But that knowledge is tainted by how it is all too often described in the financial press. Trading is risky, dangerous, foolish, bad, involves a great deal of work, etc. On the other hand "investing" is good, reliable and safe.

    Investors had a taste of what buy-and-hold can do to their capital in the 2000-2002 bear market. They lost again in the 2008-2009 bear market.

    Traders

    On the other hand "traders" take a proactive approach to their investing. Traders have a defined plan and invest with one goal, to put their capital into the markets and "profit."

    They "trade" with a plan that tells them what to do in any situation. When to enter and when to exit. They never allow large losses.

    Being a trader does not mean you must move in and out of the markets frequently. This is a common misconception. A trader simply is one who has a plan for entering and exiting. They know what to do if their trade goes against them, and they know what to do when their trade is profitable.

    Some traders go short (take bearish positions) as well as long (bullish) positions. Some are unable to go short, or they find short positions to be uncomfortable. Probably the majority of traders do not ever take short positions.

    But traders "do" have a plan. This is where they differ from investors.

    Every Trader Needs A Trend

    If you think about it, you will quickly realize every trader needs a trend to be successful.

    No matter what trading method is used, whether it is pattern trading, swing trading, long term buy-and-hold investing, fundamental analysis, technical analysis, buying or selling on news events, IPOs, splits, you name it. If the stock or mutual fund does not trend in the required direction after the trade is made, you cannot be profitable.

    This also applies to all asset classes. Stocks, bonds, currencies, commodities. You must have a trend to profit.

    Putting Trader & Trend Together

    There are two major camps when it comes to deciding what method to use to plan a trade. There are those who follow a fundamental analysis approach and those who follow a technical analysis approach.

    Traders use both methods to "forecast" future market direction. If combined with an exit strategy, either can be successful, but debate has raged for 30 years over which is the most successful strategy, as well as whether either method truly "outperforms" the markets over time.

    Some very astute market players have said that both fundamental and technical analysis approaches, though they can be profitable, usually are "no more profitable than an index fund."

    There is a scary thought. All that work when an index fund could do as well?

    But there is another approach that is almost never discussed. Many hugely successful traders use it though the financial press seldom mentions it. In fact, many who use it are very quiet about their successes. They do not try to publicly prove themselves right, they just trade and make money.

    This approach is the use of price to determine trends. Price does not forecast and it does not predict. Price is always right. If prices are moving up, the markets are advancing. Down and the markets are declining.

    At FibTimer we are "trend followers." We respond to what "is" happening instead of predicting or forecasting what might happen. We "follow" price and allow the changes in price to tell us "when" to enter or exit a position.

    Using price to determine trend does not allow trend traders to enter at the exact bottom, or to exit at the exact top. In fact, trend traders do not try to forecast the market, but instead let the market tell them when to trade and in what direction.

    Trend traders wait patiently for prices to tell them a trend has begun. Then they jump on board. If the trend fails, they exit quickly to control losses. Price tells them when to enter "and" when to exit. If the trend continues, trend traders have no predetermined profit goal. They stay with the trend until it reverses.

    Cutting losses quickly and staying with a trend until it ends is how trend traders realize huge profits in the financial markets. The financial markets are trending "about" 80% of the time. That means trend traders are profitable 80% of the time. During the other 20% trend traders keep losses very small so that they are ready when the next trend starts.

    This does not mean 80% of their trades are winners, just that they are in the plus column for that 80%. If you have three losing trades of 2% and one winning trade of 18% in a year, you finish with a 12% gain, even though most trades were losers. This fits the old saying, "cut your losses short and let your winners run."

    Conclusion

    Remember that "price" is determined by millions of investors and traders.

    By using price, trend traders take advantage of the combined wisdom of millions of investors and traders to trade a successful and profitable market timing strategy.

    Yes, it takes patience to be a successful trend trader. Yes, it takes discipline to follow the strategy and make the trades, which many times go against the prevailing wisdom. This is true of "all" winning market strategies.

    But trend traders who use price to determine trends have been quietly "beating" the markets for many years. They will quietly continue to do so for many more.

    Mar 20 8:15 PM | Link | Comment!
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