1 Simplest market timing
Why market timing
Before 2000, market timing was a
waste of time. However after that, we have had two market plunges with the
average loss of about 45%. It sounds harder to time the market than it actually
is. We have a simple technique to detect market plunges and when to reenter the
market. Our objective is reducing the loss to 25%.
Market timing depends on charts;
the following describes how to use chart information without creating charts.
Most charts will not identify the peaks and bottoms of the market as they
depend on data (i.e. the stock prices). However, it would reduce further losses.
It is simpler than it sounds. Just follow the procedure below.
The first part of this technique detects market plunges,
and the second part advises you when to reenter the market. It applies to
individual stocks too. It also works to detect the trend of a sector (entering
an ETF for the specific sector instead of SPY) and a specific stock.
How to detect market plunges without
charts (a.k.a. Death
Cross)
1. Bring
up Finviz.com.
2. Enter
SPY (or any ETF that simulates the market) or RSP for equally weighed SPY.
3. If
SMA-200% is positive, it indicates that the market plunge has not been detected
and you can skip the following steps.
4. The
market is plunging if SMA-50% is more negative than SMA-200%. To illustrate
this condition, SMA-200% is -2% and SMA-50% is -5%.
5. Sell
most stocks starting with the riskiest ones first such as the ones with
negative earnings, high P/Es and/or high Debt/Equity. Obtain this info from
Finviz.com by entering the symbol of the stock you own.
6. Conservative
investors should sell only those overpriced stocks. Aggressive investors should
sell all stocks. Extremely aggressive investors should sell all stocks, buy
contra ETFs, and even short stocks. I do not recommend beginners to be
aggressive.
When to return to the market (a.k.a. Golden Cross)
Use the above in a reversed sense
to detect whether the market has been recovering. However, when the SMA-200%
turns positive, I would start buying value stocks (low P/E but the ‘E’ has to
be positive, and/or low Debt/Equity).
1.
Bring up Finviz.com.
2.
Enter SPY (or any
ETF that simulates the market).
3.
If SMA-200% is
negative, the market is not recovering, and you can skip the following steps.
4.
Sell all contra
ETFs and close all shorts if you have any.
5. Market recovery is confirmed when SMA-50% is more
positive than SMA-200%. To illustrate this condition, SMA-200% is 2% and
SMA-50% is 5%. Commit a large percent of cash (or all cash for aggressive
investors) to stocks. If you do not know what to buy, buy SPY or an ETF that
simulates the market.
How often to check the market timing
indicators
Do
the above once a month. When the SPY price is closer to SMA actions percentage,
perform the above once a week. The charts and data for market timing described
in this book are based on SMA-350 (Simple Moving Average) that is more
preferable than this simple procedure, but it requires some simple charting.
Nothing is perfect
If the market timing is perfect,
there would be no poor folks. The major ‘defects’ are:
·
It does not detect the peak / bottom as it
depends on past data. However, it would save you a lot during the crash.
·
It is hard to determine whether it is a
correction or a crash.
·
From 2000 to 2010, there was only one false
signal. The indicator tells you to exit and then tells you to reenter the
market shortly. In most cases, you do not lose a lot. After 2010, we have more
false signals.
The market may not be
rational or may be influenced due to specific conditions such as excessive
printing of USD. If you do not mind charting, use SMA 350 (or 400) using SPY.
Buy when the price is above SMA-350 (or SMA-400), and sell otherwise. SMA-400
reduces the number of false signals, but it is not nimble.
