Market Timing Benefits Investors Too

You may have heard that it’s not wise to use market timing. The strategy of buy and hold has failed many investors over and over, but Wall Street often insists that they should do exactly that. Why? Could it be that it is in their interest? If you move your money to cash, the income received by the mutual funds decreases dramatically. It is in their interest for you to buy and hold. Stock market trading systems and investing systems rely on market timing. You really do not know the answers to simple questions like "What is a bear market?" if you don't understand market timing.

If you buy and hold and avoid technical analysis, you are saying that you will continue to invest in something, even if it is going to cost you big money. Why do that? Why not move out of investments that have generated huge gains for you, but which are now falling? How much of a loss you tolerate is up to you, but why sit in a declining market after making 100% gains and give it all back?

The key to using market timing as an investor is not to take every tiny signal and act on it. That will most often result in a day trading pattern and while that can be done successfully if you have the right temperament, that is not what we are suggesting here. (We’ll have more to say about the value of the newsletter for day traders elsewhere.) We are talking about several great ways information on investable trends could be critical for intermediate to long term investors as well as for swing traders.

  • Know the trend for the sectors in which you are invested whether you invest in individual stocks, ETFs (exchange traded funds), or mutual funds. As I’ve said, 90% of returns on stocks are attributable to the performance of the given sector a stock is in. If you invest in Apple® and the NASDAQ is plummeting, Apple’s stock will follow suit to a large extent, because it is being priced against other tech stocks. So knowing the NASDAQ trend is essential if you own Apple® stock.
  • Increase your exposure to a given market near a bottom and sell near a top. As markets stretch in value, risk increases, so it’s important to take profits in sectors that have had huge runs and redistribute those profits into sectors that are lagging but which are in up trends. Rebalancing a portfolio is something you could do using market timing.

  • Why rebalance from a sector that is still rising when you can use market timing signals to make these decisions? Why rebalance into a sector that is still falling, when you can use market timing signals to decide when to enter more safely?

    Is this fool proof? Of course not. Occasionally you may exit a sector after a pullback only to have the sector regain strength and make a new high. But you have really lost nothing over a mechanical rebalancing process. You may decide that if your desired allocation of 10% tech stocks is exceeded, you will rebalance into weaker but rising sectors automatically 4 times a year for example.

  • If in a particular year the market is in a steep decline and you need the money by the end of that year, why wait for up to 3 months to pass before withdrawing and protecting that money? It may take you another entire year or more to get back to even. It could even take a decade. If you avoid market timing, you may have to wait years for your investments to come back.
  • Take money out of the market at the right time to pay for a child’s education, to pay for retirement, or to make a major purchase such as buying a home or a car. Why take your money out too soon if you have time still before you need to meet that expense? Why not use market timing to meet your expenses? Of course, you don't simply want to throw all your money at rising trends and not pay attention to the "unknown risks" that can pop up such as major geopolitical events like 9-11. So it’s true that you don’t want to cut it too close or be over-invested beyond your risk tolerance, but what’s the point of exiting a market that is rising until you need to protect that money?

  • Use the newsletter to change your allocation to stocks when the markets are greatly overpriced. For example, a common stock allocation for for middle aged investors is 60%. It is said that you gain the most return with the least risk at that level. But if the market has gone from 25% undervalued to 50% overvalued and you simply rebalance your portfolio, since all stocks tend to move together during important trend changes, why would you necessarily want to have as much of your money in stocks when they are overvalued?

    So for example, you might normally have 60% of your retirement money invested in stocks but when the market becomes overvalued by 50%, you may decide to use market timing to reduce your exposure to 30-40%. If you go to 30%, I would definitely not attempt to call a top, but instead remove money from the market in steps. Unless you are willing to put money BACK INTO THE MARKET, you probably should never take any out. You have to know yourself on this one. Many investors buy and sell at exactly the wrong time. You must learn to do otherwise if you want to beat the markets. Being either stubborn (prideful) or fearful will lose you lots of money in booked losses as well as losses of opportunity. Be sure to read my post on Fear and Greed (button on blue bar to upper left).

  • Value Investors can benefit too Even Warren Buffett admited to buying Conoco at exactly the wrong time - when oil prices were sky high. He exited a good part of that position later. Say you, like Warren Buffett, can identify great value investments. Short of a buyout situation, why would you want to tie up your capital in a well valued stock for years before an up trend was established? Some value stocks have been value stocks for a decade. Why not wait for them to enter a rising trend to buy them? That tells you that investors have renewed interest in the stock.

So when you identify a stock in a particular sector, you can then use the newsletter to identify an up trend in that sector and in the overall market. At times, a sector may outperform or underperform the general market, so you may not need both trends in your favor, but if there is a harsh sell-off in stocks, we've generally seen all sectors take it on the chin in the end. Even mining stocks come down in panic situations in the general stock market, because stocks are sold without discrimination in those panics.

As an example, the mining sector ETF, GDX, came down with the S&P 500 recently. In fact it came down much faster than the S&P 500.

Every investor whether long term investor, intermediate term investor, swing trader, or day trader can benefit from
The Wall Street Sun and Storm Report™
.

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