A Simple Method for Market Timing

Includes: DIA, QQQ, SPY
by: Cabot

By Michael Cintolo

I’ve been thinking more and more about the historic decline we’re living through, and I think this will become a litmus test for investment advisors and money managers in the years ahead. The most popular question will be, “How did you perform during the 2007-2009 bear market?”

The advisors who fared poorly will likely struggle to get new clients or hold on to their current ones, and hence, may have trouble surviving. But the advisors that avoided most of the bear market and didn’t fall prey to the classic “you must remain fully I invested at all times!” mantra should thrive in the years ahead.

The real question you should be asking yourself if you’ve lost big money during the past year or two is, “How can I avoid this from ever happening to me again?” One answer, of course, is to swear off the market for good … put all your money in CDs and money-market funds. But I certainly advise against that–my guess is that, during the next 10 years, there are going to be huge, huge money-making opportunities, as today’s depressed levels will lead to a big bull market sometime down the road.

No, what you want is to avoid the meat of these nasty bear markets, but also profit from the following bull market. You can do it. And it doesn’t take a far seeing eye or a deep understanding of the credit markets. All it takes is the discipline to follow the market’s trend.

That’s my biggest piece of advice for you: Dedicate yourself to adhering to a trend-following market timing system. It’s not as sexy as forecasting what will happen down the road but it will be more profitable!

My suggestion is to get familiar with charts (there are many free charting programs online) and take five minutes to look at some of the major indexes every day or two. On the chart, you want to plot the index itself (say, the S&P 500), and you also want to plot its 50-day moving average. If most indexes are above their 50-day line, you should be constructive toward stocks. If most are below, you should be defensive. It sounds simple … and it is.

But such a simple system has many advantages, the biggest of which is powerful–by following the market’s trend, you’re guaranteed (that’s right–guaranteed) never to miss out on a major market upmove, nor will you ever stay heavily invested during a punishing downmove. How? Because if the indexes head south for any period of time, it will break through its 50-day moving average … and force you to turn defensive. The opposite is true for a market advance.

What’s the downside? You will be subject to the occasional whipsaw–a new buy signal, for instance, could be reversed a couple of weeks later. And that will require you to be willing to quickly change your stance. These whipsaws can be frustrating, but in the long run, they’re a small price to pay for being in (or out of) the big moves in the market.