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Market Timing Facts Vs. Market Timing Fiction

Jan. 04, 2014 1:42 PM ET
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TimerFrank's Blog
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Seeking Alpha Analyst Since 2009

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, “Growth Fund Strategies Report” which used a market timing strategy consisting of changes in interest rates, Fed changes, Market breadth and market price (using the S&P 500 Index). The strategy was hugely successful and issued a major sell signal on September 10th, 1987, just five weeks before the market crash on October 19th. In 1996 his first market timing website was launched. “Market Timer Report” used a refined strategy to market time the general U.S. stock market, and followed a variety of growth stock mutual funds. It was geared towards more conservative mutual fund investors and averaged only one to two switches a year. By the end of the 1990s, the strategy was refined to one that followed market trends instead of using interest rates and breadth on which to base market timing decisions. Because trend following never missed major trends trends, and those trends which failed resulted in minimal gains or losses, it became apparent that this was the better way to profit in what was quickly becoming a hugely overbought stock market. The bear market of 2000 through 2002 generated substantial “bearish position” profits by following trends and Frank began using Fibonacci support and resistance levels to look forward and help identify trends. In 2002 we changed the name of our timing service to FibTimer.com (live link) to better identify ourselves to prospective subscribers. We also began the process of adding new timing strategies, using our trend trading systems to develop both aggressive market timing strategies as well as conservative market timing strategies. In time we added sector fund timing, gold fund timing, bond fund timing and small cap fund timing. In 2003 we expanded to ETF timing strategies as well as starting a portfolio of individual stocks. All using our trend following systems to time the markets. Frank is currently the editor and chief market analyst of FibTimer.com, as well as president of Market Timing Strategies, Inc.

The phrase "market timing" has been terribly misused, and misunderstood, by market commentators, analysts, traders and investors.

A stock, etf, mutual fund, commodity, is purchased with the expectation it will be worth more over "time." It is sold when the expectation is that its value will decrease over "time." Any analysis intended to create a profitable return on investing, is a form of market timing.

The fact is, no one buys a stock expecting it will be worth less over time. They choose a time to buy it, based on fundamental or technical analysis, and expect that over time it will be worth more.

Market timers usually use index mutual funds covering one or more of many possible markets. They can time the S&P 500, the Nasdaq 100, Gold, small caps, bonds, U.S. dollar, etc.

Timers purchase the index fund with the expectation that it will increase in value. They sell the index fund when they expect it will decrease in value.

Just about everyone trading the financial markets is, in one way or another, a market timer.

If you think of market timers as crystal ball watchers, well...there are some out there who believe they can forecast the future. But we do not.

We use technical analysis to identify and follow market trends and we do so quite successfully.

At FibTimer, we specialize in trading index funds, as well as sector funds, exchange traded funds, and even selected stocks which tend to trend well and work profitably with our timing strategies.

Tell Us Another Story

We believe that some of the worst advice, which is given to the vast majority of investors, is to select an index fund, set up an automatic deposit program to make monthly deposits into it, and then do nothing until you retire. At that time, so the logic goes, you will be rich from the huge profits derived from your investments.

Buy-and-hold say the experts.

Buy-and-hold say the advisors who profit from your investment purchases though commissions.

Buy-and-hold say most mutual fund companies who profit from load fees so numerous in variety it would take too much space to list them all here.

Buy-and-hold say TV commentators and newsletter publishers who's clients already own the stock.

Imagine for a moment an investor, following such a buy-and-hold strategy, who planned to retire in 2002 or say 2008.

Depending on the index fund, the value of his or her retirement funds would be worth 50% to 80% less after the 2000-2002 bear market.

And if they did manage to recoup some of those losses, what happened in 2008-2009 when the stock market again lost 50%?

But those mutual fund traders who spent a little time watching the markets, who used even a simple 200 day moving average to determine that their fund investments were no longer performing well and exited to cash, avoided most of the losses and made money in money market funds.

Market timing doesn't work? Sure, tell us another story.

Change Is Inevitable

Market timing is based on the fact that 80% of stocks will follow the direction of the broad market. It is based on the fact that the markets trend over time, and have been doing so since the beginning of freely traded markets.

It is based on the fact that change in the financial markets is the one thing we can count on to always happen.

Simply said, the markets will always go up and down, and the majority of stocks in the market will follow the current trend. Change is inevitable.

And here is the key.

While over the short term, financial markets can seem very chaotic. Going up one day and down the next, seemingly with no rhyme or reason. Over time, they trend in huge up and down moves, easily seen on historical charts. And those long term moves can be traded profitably. Trend timers (trend traders) have been doing it for years. Quietly making huge sums of money while most investors, following the emotional dictates of fear and greed, lose.

Either Take Action, Or Go Along For The Ride

The best tools for making entry and exit decisions, in order to profit during upward trends and safeguard capital during downward trends, are technical analysis tools. Fundamental analysis does not take into account whether a stock is in a down trend or up trend. It is of little use to market timers. What counts is price. Is price rising or falling? Is it trending? Technical analysis can give us the answer.

As mentioned above, a simple 200 day moving average would have kept mutual fund investors (and most individual stock investors) from losing their shirts in the 2000-2002 bear market. It also would have saved them from losses during the 2008-2009 bear market. Moving averages are very simple technical analysis tools.

Obviously there are better tools than the 200 day moving average. Not everyone wants to wait until a mutual fund has dropped below its 200 day average. Much depends on a traders time frame. Are they aggressive, conservative, or active? Their emotional ability to handle losses is also a factor.

Gains can also be enhanced by aggressive traders who are willing to use bear funds during declines. In the case of the 2000-2002 bear market, our aggressive strategies that use bear funds beat the market by over 100%. In the 2008-2009 bear market, our aggressive strategies beat the market by 59%. Even our conservative strategies were safe in money market funds.

But regardless of a traders choice of funds, whether or not they are aggressive, conservative, or just don't want to lose their shirts when the markets tank, market timing is the only answer.

You either use a methodology that takes you out of declining markets, or you tank right along with the declining markets (along with all the other buy-and-hold investors).

There is little choice. Either take action or go along for the ride.

We are market timers here at FibTimer and have been for a very long time. We have realized the profits, and have also been through the ups and downs of many market cycles; bull, bear and sideways.

Exceptional results are made by following solid, tested, non-discretionary timing strategies for long periods of time. Poor results are the consolidation prize for those who follow conventional wisdom, park their brains on hold for decades, and let the markets decide whether they retire rich, or unfortunately, poor.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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