It is often said that success in the
This is what market timing is
markets, as in life, is about being in the
right place at the right time.
TheTechnicalTake is all about
identifying that right opportunity at the
right time.
TheTechnicalTake employs a top down,
quantitative and disciplined approach to
trading and investing. Consideration is
first given to the overall market
environment. We then seek the strongest
(weakest) sectors, and those sectors with
the greatest potential for price
appreciation (depreciation).
Market Timing?
At TheTechnicalTake, we are often
asked: can you time the market? Simply
put, our answer is no. However, our
models can improve the efficiency with
which you will make money.
How do we do this? By seeking market
exposure during those times we expect
prices to appreciably accelerate (or
decelerate), and by avoiding those nasty
draw downs to our trading and investing
capital. Although it would always be
nice to buy a stock or market at its very
low and sell sometime later at the exact
high, things rarely work out so neatly.
What we can do is identify those times
when we should be in the markets and
those times when we should be on the
sidelines.
about.
A Simple Example
Most traders and investors have heard of
the old stock market adage “Sell in May
and go away.” This is a stock market
timing strategy that takes advantage of
the historical tendency for the Dow
Jones Industrials to make over 90% of
its gains during the best six months of
the year. Those months are the winter
and spring months, and when the
summer and fall months come around,
Wall Street hits the beach and so should
we.
This strategy isn’t about buying low and
selling higher. This strategy is about
being in the market at the right time.
The Price Cycle
Markets move in a predictable fashion
from low to high and back to low again.
This is the price cycle. Market
practitioners have devised many tools to
divine those highs and lows, but few of
these work with any consistency.
At TheTechnicalTake, investor
sentiment plays a big role in
characterizing the most important highs
and lows. Fear and greed are fairly
consistent behaviors at market bottoms
and tops, respectively. Exhaustive
research has shown that the best, most
accelerated market gains occur when the
majority of investors are on the sidelines
and fearful of further market losses. As
the market turns, those on the sidelines
pile back into the market chasing
performance and propelling prices
higher. This is when our price cycle
begins.
When those same investors are overly
bullish and complacent in their outlook,
stocks are generally facing headwinds as
those already invested are “all in” and
there are few investors on the sidelines
to keep prices moving higher. At this
point, we expect the price cycle to end.
Beat The Market With
Decreased Risk: The Market
Bias Timing System
At TheTechnicalTake, the Market Bias
Timing System attempts to capture the
highs and lows of the price cycle. This
extensively researched model is based
upon 16 years of sentiment, market
breadth, and price data.
From February, 1992 until August, 2007,
there have been 37 bullish signals with
the average bullish signal lasting
approximately 50 trading days. The
Market Bias Timing system will be in
bullish mode 50% of the time; 25% of
the time there will be a neutral market
bias and 25% of the time the model will
be in bearish mode suggesting that there
is no edge to being long the market or
that there is potential for significant
losses.
The Market Bias Timing System has
been tested on the S&P500, NASDAQ,
and Russell 2000 markets. As many
sectors and international markets are
highly correlated with the major stocks
indices, this model has also served as an
excellent guide to the direction in these
markets as well.
S&P500
Over the past 16 years on the S&P500,
when the Market Bias Timing System is
bullish, it has generated a 13.6%
compound annual growth rate. (This
includes the returns from being in
commercial paper when the model is
neutral or bearish.) Over the same time
frame, a buy and hold strategy generated
an 8.4% compound annualized return.
With the model, a $10,000 investment in
1992 becomes $73,078 in August, 2007.
With buy and hold, a $10,000
investment turns into $35,173.
With the Market Bias Timing System
bullish and applied to the S&P500,
you are able to generate a return that
is twice that of buy and hold with 50%
less market exposure. This is efficient
market timing!
The equity curves for the Market Bias
Timing System and buy and hold of the
S&P500 are shown in the following
graph.
Not only does the Market Bias Timing
System beat buy and hold for the
S&P500, but it does so with
substantially less risk. To measure risk,
we look at the underwater equity curve.
The underwater equity curve looks at the
depth and duration of the draw down
generated by a particular strategy. This
is an important measure of risk because
draw down tells us how much money a
strategy could lose and how long the
losses could be sustained.
Over the past 16 years when applied to
the S&P500, the Market Bias Timing
System has had two draw downs of
about 10%. In other words, following
this strategy on the S&P500, you would
have never lost more than 10% of your
equity at any one time. With a buy and
hold strategy for the S&P500, the
maximum loss would have been 44%
with several periods exceeding 20%.
The underwater equity curves comparing
the bullish signals from the Market Bias
Timing System versus buy and hold
S&P500 is shown in the next figure. At
all times, the drawdowns with the
Market Bias Timing System are
significantly less than buy and hold.
So why does the Market Bias Timing
System work? Because it produces
more money than buy and hold and
with substantially less market risk.
This is efficient market timing.
NASDAQ
When the Market Bias Timing System is
bullish and applied to the NASDAQ
market over the last 16 years, it yields a
22.2% compound annual return. (This
includes the returns from being in
commercial paper when the model is
neutral or bearish.) Over the same time
period, a buy and hold NASDAQ
strategy generated a 9.2% return. When
the model is bullish, a $10,000
investment in 1992 becomes $227,980 in
August, 2007. With buy and hold, a
$10,000 investment turns into $39,452.
In the NASDAQ, the bullish signals in
the Market Bias Timing System
produced a return almost six times
greater than buy and hold, and with
50% less market exposure.
The equity curve comparing the Market
Bias Timing System to buy and hold
NASDAQ is shown in the next figure.
What about risk? The underwater equity curves comparing the Market Bias Timing
System versus buy and hold the NASDAQ is shown in the next graph.
With the Market Bias Timing System,
there was one extreme draw down period
or loss of capital of almost 23%. At
some point while following this strategy
on the NASDAQ, you can expect to
encounter losses that are likely to exceed
14% (i.e., the average of the 5 worst
draw downs). This illustrates very
nicely that market timing doesn’t
necessarily mean buying the exact lows
and selling at the exact highs. Market
timing is about defining those periods
when gains are likely and risks to capital
are acceptable.
However, compared to buy and hold the
loss of capital was 3 times less. The
2000 to 2002 bear market produced a
draw drown that exceeded 70%. In other
words, from high to low, the NASDAQ
(like the accounts of many buy and hold
investors) lost over 70% of its value
during the most recent bear market.
Summary
At TheTechnicalTake it is our belief that
buying the exact low and selling the
exact high are futile. Market timing
should be called market efficiency.
You need to identify those periods when
you will make money most easily, and
understand when risks are mounting.
Market timing is about being in the
markets at the right time!

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