Timing the Market

Heather Cullen

Author
In The Money

November 27, 2022

Timing the Market

Don’t try to time the market! Don’t miss the 10 best days! Stay fully invested! The warnings are coming thick and fast. The message?

Your portfolio can suffer heavily if you miss even a few of the best days in the market, and you never know when they’re coming. Best to stay fully invested at all times.

Every junior finance reporter and financial advisor is suddenly an expert. You can’t avoid the headlines:

It’s time in the market, not timing the market

Studies show that market timing doesn’t work.

Staying invested through all market conditions is a time-tested strategy for achieving investment success.

Buy and hold is the wisest thing to do

And my favorite:

6 Reasons why market timing is for suckers

Well, I guess I am a self-identifying sucker. These dire warnings just make me quite cross because they are so unrepresentative of what’s really happening. They wear people down and many, many people actually believe what they say, to the detriment of their portfolios.

The Worst Offenders

The worst offenders are the press, who breathlessly report doom and gloom with what seems like relish. To show exactly what I am talking about let’s take a look at a CNBC report on a Bank of America Study. The headline:

This chart shows why investors should never try to time the stock market

Just in case you didn’t get the message it has 3 key points at the top of the article:

Investors should avoid the impulse to time the market, new data from Bank of America shows.
Looking at data going back to 1930, the firm (BoA) found that if an investor sat out the S&P 500′s 10 best days per decade, total returns would be significantly lower than the return for investors who waited it out.
And the market’s best days typically follow the largest drops, meaning panic selling can lead to missed opportunities on the upside

It then shows a table, not a chart (OK, being picky here), invery small print going back 100 years, headed in larger print ‘The difficulties of trying to time the market’. It goes on to explain that missing out on the 10 best days each decade means that an investor would have earned a total return of 28% (in a hundred years – not great) whereas the investor who stayed in the market through thick and thin would have a return of 17,715%.

The report warns against selling after drops, and notes that it takes about 1,100 trading days on average to recover losses after a bear market. That’s 3 years!!! And they are suggesting that the best strategy is to stay in the market, quote:

The better bet is to simply stay in (sic) invested.

Given that we have had six bear markets in the 22 years since 2000, that means 18 of the years have been spent making up the losses. That doesn’t sound like a great strategy to me.

The Silliest Assumption

I have been replicating, as far as possible, these figures (OK, I get it, a bit too nerdy, but I can’t help myself!) and the design of the study is so absurd as to make you laugh out loud. The program design is that somehow a trader is going to know that the following day is going to be one of the ten biggest rises in the decade (before the decade ends!) and gets out on the close of the day before and gets back in at the close of the next day.

Yeah, that’s reasonable. NOT.

But given that is what their study does, and no-one has called them out for being ridiculous, let’s look at the other results in the study that barely rate a mention, certainly not in the headlines, headings, or key points.

Missing the 10 Worst Days

Let’s look at the actual data as reported in the article itself. Reading from the table the results are:

Staying invested for 100 years: 17,715%
Excluding best 10 days: 28%
Excluding worst 10 days: 3,793,787%
Excluding best 10 & worst 10: 27,213%

Unbelievable . . . a return of almost 4 million % doesn’t make it into the headline? Just by avoiding the 10 worst days? That’s a return more than 200 times greater than missing the 10 best days, but its not important? Just so that you get the picture:

Of course, avoiding the 10 worst days is just as ridiculous as avoiding the 10 best days – but let’s be fair. Sauce for the goose etc. If the 10 best makes it into the headlines why doesn’t the 10 worst? Could there be an undisclosed motive?

Just think: in whose interests is it to have you remain fully invested in the stock market when it is clearly against your interests? There’s a saying: follow the money. Who makes money from an investor who stays invested through thick and thin? Certainly not the investor.

ITM Market Update

Well, still no conclusive direction from the market. The golden cross has not eventuated, and I now wonder if it is going to happen any time soon. While the chart looks as though it is closing on the golden cross, other indicators are showing a different story. But let’s take it bit by bit. First, the candlestick chart with the SMAs on it.

It looks like the 10 SMA is closing in on the 200 SMA – which would be nice. A new bull market! Who doesn’t want that! BUT . . . there are a few other things at play here. The next chart is rather busy, but let’s take it step by step.

The top part shows SPY for 2022, with 10, 20 and 200 SMAs, correction and bear thresholds. I have put rectangles around the rallies we have encountered this year, all of which looked like the bear trend may be turning but they all eventually fizzled out becoming classic bull traps.

Underneath I have plotted the volume, and have marked in a thick magenta line the volume trend during these rallies. you can see that all of them trend downwards, meaning that the bulls were running out of conviction and steam as the rally wore on, and so the rally didn’t last. Charting is not an exact science – many things impact the volume – e.g. the shortened day last Friday – but I think there is enough there to indicate that the bulls have been rather half-hearted this year. If we look at another indicator, OBV (On Balance Volume) we get the same picture.

On Balance Volume is a momentum indicator that measures buying and selling pressure. It is a cumulative indicator that adds volume on updays (all the day’s volume, not just the up-intraday) and subtracts volume on down days. It is thought of as a leading indicator, meaning that it is used to predict price changes.

Typically, a rising OBV is indicative of higher prices, and a falling OBV can lead to lower prices. You can see that OBV has been falling all year, but it is particularly noticeable that during the July / August bull trap the OBV did not rise, signalling that the rally probably did not have legs, and in this case OBV was right.

In the current rally the OBV is slightly more positive but it is positive enough to sustain the rally? Or will it turn into another bull trap? I wish I knew, but Mr Market is not letting me into the secret!

What about ITM?

We’re still out of the market, waiting for a definitive signal. The golden cross looks like it is getting nearer, but we’re not there yet. It could be another bull trap. At the time of writing this12 hours before market open the futures are down significantly, SPY down 0.58% and QQQ down 0.83%. Not looking good, but things can change so we will have to wait and see.

I wsa asked if I could publish a visual guide or guage so that people could see at a glance whether we were in or out of the market. I explained that as I am not a financial adviser I can’t advise people when to buy or sell, but I thought about it and came up with this idea. Not terribly satisfied with it. I hope its not too cryptic, and if anyone has a better idea please email me at Info@HeatherCullen.com.

Reader's Q&A

Where do you get your images from?

I usually source images from Pixabay or similar, and then I photoshop them into what I want. For example, the one at the top of this blog was an image of a bull in a herd, so I captured the bull face I wanted. Then I downloaded an image of a ring-fence and removed the BG and superimposed it over the bull to (hopefully) portray a bull trap or bulls being fenced in and unable to run free.

I don’t claim to be any sort of expert at photoshopping – far from it! – but it is the only way to get images that portray exactly what I want.

Do not completely understand what you are doing and am likely too old to learn. Your logic seems to be more of a long term strategy. What to do?

I think that if you have come directly into the blog without reading the first ITM book it would seem rather confusing. Could I suggest that you get a copy? Here’s the link: Amazon In The Money Heather Cullen.

My question for you relates to ITMB – would it make sense to adjust the trigger value of +/-0.5 on the MACD histogram broadly in line with the magnitude of SPY over time?

Yes, this is absolutely correct – as SPY increases so will the height of the histogram. During backtesting the 0.5 level worked and I didn’t want to get too complicated by saying the histogram should be a certain percentage of SPY, so I went with the simple explanation. In the future when SPY starts to make new highs (oh, yes, please!) I will update the book if necessary.

I just finished Reminiscenses of a Stock Operator. Any other books that you recommend?

I wish there were – one of the reasons I wrote the ITM books was because I could see the unhelpfulness of the advice in every book I read (and I read lots!). However, one other book I enjoyed it and it taught me a lot was How I Made $2,000,000 in the Stock Market by Nicholas Darvas, who developed the ‘Darvas Box’ theory.

He was a very interesting character, and was a famous professional dancer. The book is quite old, as he was trading in the 1957/8 bull market, with a daily telegram with prices on it as his only stock market information. Obviously, things have changed, and there is a version which says it is updated for the 21^st Century. I haven’t read the update, but here’s the link: Amazon Nicholas Darvas

I have tried to download the 2022 edition (of In The Money : Bull market Strategy) from Amazon (the picture says 2022 edition) but I keep getting the older one. Could email me the chapter on small accounts?

Hey Johanna, this is disheartening as I thought that these troubles were all behind us! You’re the first person in months to let me know that Amazon has sent the wrong book.

Unfortunately, I don’t have any more luck with Amazon that anyone else – authors are not treated any differently to customers. I would encourage you to try customer service again, when this was a problem some months back many readers said that they got replacement books although sometimes they had to phone and get a different customer service officer.

Re sending a copy of the small accounts chapter – I think it wouldn’t make sense out of context as the 2022 edition was quite a bit different to the original. Not in the ITM strategy, but it had extra backtesting and explanations. Besides, the eBook, paperback and hardback are all in different formats and have to be extensively edited before going up as an eBook or into print, so it is not really practical as you wouldn’t be able to read them. So I would urge you to try again with Amazon.

Don’t you think the new bull market has started? Shouldn’t we get in early?

I wish I knew if it had started! But I don’t know, nobody does, and we’ll only know for sure afterwards. My take right now – as in the discussion above – is that there is a relatively high probability that this rally won’t last and we’ll head down again. But that’s a guess, I’ll be watching the chart to see what’s happening. Sorry – if I had a crystal ball that worked, I would tell you!