Market Timing: Fact or Fiction

With last week being a holiday-shortened week, there were few critical developments that impact how we would manage any of the Focus Markets that we trade.

I thought it would be a good time to circle back and discuss an article I came across some time ago about a couple of misconceptions about investing.

I like to scan through certain mainstream news and financial sites on a periodic basis to get a sense of what is being written for the average individual investor and as a very imprecise sentiment indicator. I also scan these sites to kick my brain into gear and possibly come away with ideas for commentaries.

During one of these scanning sessions, I came across an article in USA Today written by a guy named John Waggoner, “Investing: Market Timing is for the Birds.”

The premise of the article is that if investors watch the stock market they worry. If the market is up, they worry it will fall. If the market is down, they worry it will fall further. So, most investors are better off bird watching rather than market watching.

I’m not going to devote any time to rebutting whether or not most investors are worry warts but rather I’m going to take issue with whether you can time markets or not and also with the 2 examples he uses to prove his point that markets can’t be timed.

Waggoner begins by stating that you can’t predict market tops and bottoms. This is partly correct.

No one can know, in advance, what will the exact top price of a given market and the exact bottom price. I don’t consider “market timing” to be the ability to call the exact top or bottom of a move. I consider “market timing” to be the ability to consistently perceive a change in trend that allows you to catch or avoid 70-80% of a price move, up or down. This is because:

1.       Market tops and bottoms are processes, not events.

2.       No one has a crystal ball.

But just because you can’t predict that exact top and bottom of a market doesn’t mean that you can’t, with minimal effort, step aside and miss the majority of a major correction.

Case in point, when I began publishing TWR in December 2012, I had SHORT bias in GLD, which was trading at $164, that remained unchanged through October 28, 2013, when GLD was trading at $130.

GLD peaked in early September 2011 at 183.23, declined over the next month and then traded sideways until hitting an intermediate-term peak in October 2012 at 172.62. GLD went on to have a major correction which finally bottomed in late December 2013 at 115.94, for a total peak to trough decline of 33%.

If you heeded TWR’s SHORT bias, then you missed 60% of this decline. If you heeded the NEUTRAL bias I maintained in GLD from October 28, 2013 through January 6, 2014, then you missed 88% of the decline. And if you shorted GLD based on this bias, you made money instead of just not losing any.

More recently, another of our Focus Markets, OIL, peaked on June 20, 2014 and has since fallen 70%, over the following 76 weeks. I maintained a LONG bias on OIL for the following 3 weeks before shifting to a NEUTRAL bias on July 14, 2014.

Since then, I’ve held a NEUTRAL bias 20% of the time and a SHORT bias 80% of the time. So while I had a LONG bias on OIL for the first 6% of the decline, I’ve been spot on for the remaining 64% of the decline.

In hindsight, it's easy to say you should have been SHORT OIL but there have been several 20-35% rallies over that time frame.

As with GLD, you could have profited from being SHORT but it's extremely valuable to your portfolio to side step a market that is getting cut in half. And I’m not cherry picking, at some point, over the almost 3 years of publishing TWR, my Focus Market biases have consistently caught these types of moves.

Right now, I'm on the sidelines in both GLD and OIL.

Always Late, Always Early...The Way It Should Be

I am ALWAYS late to these types of trend changes and ALWAYS early to get out but the beauty is that market timing in the form of consistently capturing or avoiding 70-80% of a move can be accomplished.

Waggoner goes on to say investors won’t get an accurate warning from market timing professionals and then gives a long diatribe about the Elliott Wave Theorist (EWT) newsletter. Waggoner does correctly point out that EWT are perma-bears and if you say the big crash is coming week after week and month after month, eventually you will be correct.

The real question is, what was your track record during all the years leading up to the crash?

That said, I have two issues with this segment of the article. First, are newsletter writers really “market timing professionals”? Based on my own due diligence, it appears as though most newsletter writers are not professional money managers; they don’t manage real money, in real time.

They manage fake money in fake portfolios. I’m much more inclined to listen to the warnings or forecasts of guys that are at the helm of billion dollar books rather than a guy whose virtual trades tell you to buy an ETF that trades 4 shares a day.

Second, Waggoner picked the worst representation of newsletter writers to make his point. Elliott Wave Theorists rely on Fibonacci ratios for their forecasts. This is not the DaVinci Code or Angels and Demons. I’m certainly not Tom Hanks and I’m not running around Paris and the Vatican.

Ralph Elliott wrote about how ratios were responsible for many things in the universe, how you could read the mind of god and if ratios are so important in nature then they should run financial markets as well. I didn’t make that last part up.

The reality is that Fibonacci ratios do not have an objective influence on prices and as such do not provide a trader an edge in the markets. My own personal research bears this fact out and if anyone is aware of statistically based research which says otherwise, please email me.

In addition, most Fibonacci-based philosophies incorporate 50% as one of the retracement levels. This interesting for 2 reasons:

1.      This is not a Fibonacci ratio and

2.      Its actually the one retracement level that does have an objective influence on prices, albeit with a very wide margin of error.

So, do yourself a favor and leave Fibonacci sequences for Hollywood; take them off your charts immediately and out of your investment process entirely.

For those of you who are still not convinced and are determined to include witchcraft as part of your process, EWT issued a warning last September that the worst sell off in 50 years was upon us, the S&P 500 is up 8% since then.

The bottom line is to do yourself a favor and spend less time watching talking heads on CNBC or reading newsletter writers that are perma-end of the world that end up being right once every 10 years and lose their asses for the nine years in between.

Focus on building a process utilizing tools and information that consistently allow you to capture large chunks of intermediate-term rallies and helps you side step bear markets across all asset classes.