Timing Methods

Making up losses is much harder than reinvesting stored capital once a clearer picture emerges. - Jeff Saut 2015

Identifying the primary market trend has become critical to long-term successful mechanical investing. Extensive drawdowns in stocks - MI screens in particular - were avoidable during bear markets (2001-2003, late 2007- early 2009). The goal: provide MI users a proactive defense against significant market drops.

"But I read timing doesn't work because it doesn't improve your returns and you have to be right twice."
Do yourself a favor, and read maybe the best thread on Timing on the MI board. (There are plenty of others.)

The 3 BearCatchers

Extensive research by MI wizards identified a few critical signaling methods that identify bearish environments. These methods:

  • are simple and repeatable
  • generate few signals per year
  • have a high rate of “correctness"
  • provide high degree of portfolio protection from lengthy, damaging bear markets.

These were dubbed "the Bear Catchers":

  1. The NewHighstoNewLows trend
  2. The 99DayRule (a.k.a. “Dying Bullish Euphoria”)
  3. The SMA Slope Simple Moving Average Slope

Market timing is about identifying market momentum. Each of these signals helps highlight the intermediate trend in the markets, out 3 to 6 months. The methods can be applied to any stock index with available data, such as the S&P500, Nasdaq 100, Nasdaq Composite, Wilshire 5000, Russell 2000, etc.

The signals issued are simple: Bullish, or Bearish. Generally,

  • a Bullish signal indicates conditions are favorable for buying stocks long, the intermediate trend is up.
  • A Bearish signal indicates conditions have become less favorable, the intermediate term trend is down; stocks appear at increased risk of a meaningful decline.

Using the BearCatchers as Defense

When 2 or more Bear Catchers are bearish, investors would be wise to consider temporarily exiting or avoiding the equity markets to preserve capital. When one is bearish when others are bullish, investors should be alert for a trend switch.

Backtests show that these signals do not improve overall rate of return (CAGR). What they do well is reduce volatility - and take you out of the market to avoid situations that in the past have produced major losses (2000-02, 08-09, 2011). They will not catch short term minor market tops or bottoms.

Other Timing Methods/Signals

Monthly Timing Signals - evaluate at the beginning of each month:

  • A 12-month/6-month lookback:Mungo recommended the tuning factor at a little over 6%.
  • Monthly highs vs lows with 12 month lookback (Mungo): At the end of each month, take the highs and lows of the S&P for the 12 calendar months just ended (24 numbers). See how many of those are higher than today's index level. If it's more than 40% of them, go to cash for the calendar month. This improves long run returns by about 2% per year, and drops risk by over 1/3 (using downside deviation)

Key: A large risk of using timing signals is being too jumpy and leaving the stock markets too early. An investor can destroy their returns this way. The best timing systems produce the fewest signals per year and protect your assets during a bear market.

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