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. 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).
sidelines. This is what market timing is 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.
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
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.
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.
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
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.
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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