Tag Archive | "Market Timing"

Does Stock Market Timing Work?

The Pros and Cons  Of Stock Market Timing

Stock Market TimingA question that often crosses stock market traders and investor’s minds is: does stock market timing work?  Financial advisers strongly advise their individual investor clients to avoid stock market timing and to leave those types of trading strategies to professional traders and investors.  In reality, a strong case can be made both for and against stock market timing.

The case for stock market timing is that the stock market often does work in a cyclical manner, and if a trader or investor can identify reoccurring movement within the market, they can vastly increase their profits by timing when to buy into and sell out of stocks.  The case against stock market timing is that the stock market is erratic, and those who are not holding stocks because they are trying to time the market could miss out on unexpected upside moves in stock market averages.  Additionally, even if a stock market trader or investor properly identifies reoccurring movement within the market, many fail to act on the buy and sell signals they are provided by the stock market, and therefore fail to properly implement stock market timing strategies.

How To Implement Stock Market Timing Strategies

Unless one has the time to follow stock market events, then there is really no point in even attempting stock market timing.  If a stock market trader or investor is committed to following stock market events and identifying stock market buy and sell signals, then they can consider stock market timing.  Stock market buy and sell signals can include a wide variety of stock market indicators, from the average price /earnings ratio (P/E ratio) to investor enthusiasm (which is used as a contrarian indicator).  The key is to study the stock market timing signals and back-test them (see how they performed in the past), and then to act on them once they flash a buy or sell signal.  It is a good idea to use a variety of stock market timing signals to ensure you are not being fooled by an erratic signal.

A simple stock market timing strategy that does not require a lot of analysis, but is also not always a winning strategy, is to sell a portion of a stock trading or investment portfolio during earnings season, as stocks often enjoy a near term top when good earnings news causes them to spike higher, and then buy back the stocks for less before the next earnings season.  It is not uncommon for stocks to settle back after earnings season, when they are driven by news events rather than by earnings announcements.

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Trading a Retirement Account Can Lead To Greater Returns

Trading A Retirement Account Means Trading Economic Cycles

Trading a Retirement AccountConservative investment advisers live by the mantra of “buy and hold” or “dollar cost averaging” stock market investing, and would never recommend that a client start trading a retirement account to try to achieve greater investment returns.  These conservative stock market investing strategies leave retirement savings in mutual funds or other investment stock-based vehicles for decades, waiting for them to eventually appreciate in value over time.  While this strategy makes a lot of sense during periods of strong economic growth and for investors who have no interest in trying to make extra money from stock market swings, buying and holding stocks has proven to be a losing strategy over the past decade of anemic economic growth.  For more information about buy and hold and dollar cost averaging stock market investing, see:  How to Play The Stock Market.

High profile corporate bankruptcies in companies once thought rock solid, such as Enron and AIG, have proven the folly of buying and holding individual stocks in a retirement account.  Unfortunately for investors looking to protect themselves by buying broader based stock index funds, exchange traded funds (ETFs), and mutual funds, these broadly based investment vehicles have on average performed very poorly over the past decade.  Some select mutual funds have done better than the stock market indexes over the past decade; however, given the risk associated with holding stocks, the average returns from broadly based stock funds have been very disappointing.  Stock market index returns over the past decade have averaged less than 1% per year when averaged out over the 2001 to 2011 decade.  The Standard and Poors 500 Index (S&P 500) has only moved from the 1,200 range to the 1,300 range from 2001 to 2011, which is only an 8% move higher.  During this time period, there was a great deal of volatility that twice sent the S&P 500 more than 33% lower to below the 800 level.  More recently in 2011, the S&P 500 has dropped approximately 20% from peak to trough.

While stock market declines are unnerving for buy and hold investors, those willing to considering trading a retirement account can take advantage of stock market volatility to potentially increase the value their retirement account.  Trading a retirement account requires an investor to be in tune with the economic cycle and to have a great deal of patience.

Typically, the stock market discounts economic events six to nine months in advance.  If a sustained period of economic growth is showing signs of coming to an end and a prolonged Bull Market appears to be making a top, it could be a good time to move some retirement money from stock based investments in to interest bearing cash investments that are not affected by the movement of the stock market.  Once a portion of an investor’s retirement money is in cash investments, an investor has to be patient and wait for the stock market to change trends to a Bear market and for the economic cycle to run its course into an recession or economic slowdown.  Historically, the stock market has dropped an average of 25% from peak to trough, as the economy changes from growth to recession.

The time to move retirement money out of interest bearing cash investments and back into stock based investments is approximately half way through a recession, as sentiment on Wall Street turns excessively bearish and the economy appears bleak.  At this point, the forward looking stock market will start looking towards an economic recovery and will start moving higher long before a recession ends.  Given the performance of the stock market during past recessions, a new Bull Market should begin well before the economy actually shows signs of growth.  The new Bull Market will then sustain itself with continued stock market gains, as the economy starts to grow again.  For more information about trading the stock market trend, see:  Trading The Stock Market Trend.

Trading a Retirement Account Means Selling High and Buying Low

While it would be foolish for investors to sell all of their retirement investments and start trading a retirement account, it is not a bad idea in this era of low economic growth and anemic stock market returns to dedicate a portion of a retirement account to long term trading strategies that take advantage of the changes in the economic cycle and the stock market trend.  Trading a retirement account boils down to a simple long term trading strategy, sell stock-based retirement investments while the stock market is peaking, and buy them back while the stock market is in a trough towards the middle of a recession or economic slowdown.

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