What you need to know about market timing
One fact holds and has been for decades: there is a lot of money to be made in the stock market. But then, how you set about investing is entirely up to you. Some investors specialize in “buy-and-hold” tactics; this is a strategy that involves buying a mutual fund, ETF, or stock and holding it for a period that extends from the present far into the future.
However, other investors make use of a definitive strategy known as “market timing.” These investors’ goal is to take advantage of the short-term/temporary fluctuations of the stock market and make money within a short period.
Both strategies of making money in the stock market are not wrong; however, there are experts out there who claim that timing the investment of asset classes is a terrible idea, especially over the long term.
Even though the chances or odds may be somewhat stacked against you when it comes to making a significant amount of money by following the market timing route, the fact remains that you can still make a substantial amount of money.
What is Market Timing?
This active strategy can be an approach employed when making crucial buy or sell decisions of stocks or other financial assets by predicting future market price activities. These predictions are usually based on economic or market conditions, which result from fundamental or technical analysis.
It involves moving in and out of the stock market by using what is known as “technical analysis.” Technical analysis includes studying the charts of specific companies and making investment decisions based on how the stock moves.
It could also mean taking a look at consumer spending, economics, GDP (gross domestic product) to make informed investment decisions.
But whichever method or approach you make use of is not too important; what is essential, however, is that you are always on the move, i.e., moving in and out of the stock market, trying to make a profit.
Is It Possible to Time the Market?
Now that you know what market timing is, let us take a look at some of the reasons why financial experts claim that this method of earning a profit in the stock market is not feasible.
Predicting the next direction of the stock market is somewhat tricky. This is why some mutual fund investors who attempt to time the market usually fail compared to investors that remain invested.
Another reason that most of these experts allude to is that run-of-the-mill investors do not have the time and skill to be engrossed in timing the market. Thus, the likelihood of pulling it off over the long term is rather slim.
If you are a savvy investor or business person, you will agree that most investors out there do not have the time to invest in an effective and functional trading strategy. If you plan to follow this strategy and hope to make serious money in the long term, you need to keep an eye on the market all day long, every single day. Timing the market is not an approach you can use at irregular intervals and for a few minutes.
Even if you get lucky and make a considerable amount of money, it is not a strategy that will survive in the long term. This is evident, as many investors who choose to follow this route often lose a lot of money in the long run.
Here are some other reasons why this active strategy appears to be a bad idea for most investors out there:
i. Opportunity Costs
Most investors usually make most of their profits over a few days, especially when the market performs exceptionally well. Missing these few short days on the premise that you are out of the market may result in a significant loss of money.
ii. Trading or Transaction Costs
Buying and selling securities cost a lot of money, and these expenditures eat into whatever profits or gains you may earn. This could end up costing you a boatload of money in the long run.
iii. Taxes or Taxation Costs
It is a known fact that short-term gains attract high tax rates. Taxes also reduce your profits and – as with trading costs – lead to a considerable loss of money.
Many investors count this trading strategy as a corporate form of gambling since it is based purely on chance. This is because most of them do not rely on overvalued or undervalued markets.
Does it pay?
This investment approach is not an impossible endeavor. Some investors have been able to use this strategy to accurately foresee market shifts consistently, thereby gaining a substantial advantage over their buy-and-hold counterparts.
According to the estimation put forward by Morningstar, between 2004 and 2014, some portfolios that were managed actively and moved in and out of the market returned 1.5% below passively managed portfolios. Therefore, to gain an edge, active investors, i.e., those who use this trading strategy, have to be accurate or precise, at least 70% of the time. This is practically impossible over that period.
A Few Short Tips to Keep In Mind
i. Consider Long-Term Cycles
Recall that bull markets became virtually non-existent in the six years of the Ronald Reagan administration and the eight years of both Bill Clinton and George Bush’s administrations.
However, the Obama/Trump bull market continues to thrive since 2009. These notable cycles and analogs indicate one thing; the significant difference between exceptional returns and misplaced opportunities.
Long-term market forces that are somewhat similar include:
• Currency trends
• The ebb and flow of interest rates
• Nominal economic cycle
ii. Make Your Purchases within Ranges that Establish New Trends
Markets tend to trend lower or higher – up to 25% of the time – within all holding periods and may even proceed sideways and trade ranges during the remaining 75% of the time.
A brief review of the monthly price pattern will help determine how prospective investments will line up along the trend-range axis. Such price dynamics follow the age-old market wisdom that declares, “the bigger the move, the broader the base.”
iii. Keep an Eye on the Calendar
Like any other commodity markets, financial markets also experience annual cycles that favor unique strategies at different times of the year.
For instance, tech stocks are known to perform remarkably well from January to the summer months, then trail off or decline until November or December. Small caps – i.e., companies with a comparatively small market capitalization or market value of its outstanding shares – show what is known as “relative strength” in the first three months of the year. It eventually fades away into the fourth quarter, during which speculations on the new incoming year rekindle interest.
(Relative strength is the momentum investing procedure that evaluates the working effectiveness of an ETF (exchange-traded fund), a stock or mutual fund to that of the global market.)
These cycles adopt the “Sell in May and go away” strategy, based on the past shortfall of stocks in six months that starts in May and lasts through October instead of the November to April period.
Market timing may get a bad rap, but it can result in profitable investments and other long-term positions if carried out using technical analysis. This involves finding the best times and prices to take disclosure to book profits.
Furthermore, these ageless concepts can be developed such that active investments will be adequately protected and red flags raised immediately when market conditions change extensively.
Sniper Market Timing is providing this website and its information for guidance and information purposes only. The information contained herein has been compiled from sources deemed reliable. It is accurate to the best of our knowledge and belief; however, Sniper Market Timing cannot assure its accuracy, completeness, and validity and be held liable for any errors or omissions. All information contained herein should be independently verified and confirmed. Sniper Market Timing does not accept any liability for any loss or damage howsoever caused in reliance upon such information. Reader agrees to indemnify and hold harmless Sniper Market Timing from and against any damages, costs, and expenses, including any fees, potentially resulting from the application of any of the information provided by Sniper Market Timing. The Sniper timing system has not been applied over a significant period in real trading. Recommendations made in the future may or may not equal or better the Sniper timing system’s performance as simulated by historical backtesting.
The analysis, ratings, and/or recommendations made by Sniper Market Timing, snipermarkettiming.com, and/or any of its suppliers do not provide, imply, or otherwise constitute performance assurance. Past actual or simulated performance is no guarantee of future results. Therefore, it should not be assumed that future results will be positive or will equal past performance, real, indicated, or implied. Sniper Market Timing offers no assurance regarding the accuracy, market predictive powers, suitability, or effectiveness (either expressed or implied) of any of the information provided. This website has been prepared solely for informational purposes. It is not an offer to purchase or sell or solicit any offer to buy or sell any security or instrument or participate in any trading strategy. The trading instruments and the trading signals discussed on this website may be unsuitable for investors depending on their specific objectives and financial position. The trading instruments’ price or value to which this website relates, either directly or indirectly, may fall or rise against investors’ interest. Any market exposure always entails the possibility of substantial loss of equity. Reader agrees to assume all risk resulting from applying any of the information provided by Sniper Market Timing.
Additionally, to usual risks embedded with investing, international trading may involve the risk of capital loss due to fluctuation in currency values, from differences in accounting principles, or economic and/or political instability in foreign countries. Any commercial realization of the information provided by this website without written permission from Sniper Market Timing is strictly forbidden. Trademarks and copyrights mentioned on this website are the ownership of their respective companies. The names of products and services presented are used only in an educational fashion and to the benefit of the trademark and copyright owner, with no intention of infringing on trademarks or copyrights. Sniper Market Timing and/or its principals may purchase or sell any of the securities cited on this website.