11/2/2014 Alternatives to Timing

Sector Model	XLF	1.71%
Large Portfolio	Date	Return	Days
SR	6/2/2014	2.19%	152
CFI	6/9/2014	6.27%	145
ESI	8/4/2014	-29.35%	89
BSET	8/11/2014	16.80%	82
STRA	8/18/2014	24.30%	75
PBI	8/25/2014	-7.38%	68
CLF	9/2/2014	-25.48%	60
KFY	9/29/2014	7.13%	33
IQNT	10/6/2014	35.62%	26
EDU	10/27/2014	-3.36%	5
(Since 5/31/2011)
S&P	Annualized	12.20%
Sector Model	Annualized	25.59%
Large Portfolio	Annualized	23.92%

 

No rotation.

So, the market had its big scare just before Halloween, only to recover with a vengeance:

 

And now, what? 

Think about two weeks ago, when so many pundits were predicting a bear market.  Are they wrong?

I don’t know.  New highs don’t disprove a bear market any more than new lows disprove a bull.  We can’t predict the future.  We want to.  Most of the things we read about the market claim to.  But the truth is that we can’t.

Part of the reason is that anything that is “obvious” to the retail investor is also obvious to the treasury manipulator, who can print money at will.

So what IS the guaranteed market call?

“Up.”

Not every year, and not even every decade.  But in the long term, the market goes up, and when it doesn’t, the dollar (or whatever currency you use) is falling against it.

But can you make more money if you time the market?

Of course – IF you really can.

I can’t, so I don’t.

So, what are your options?

1)      Dow Theory: this is an old point and figure style of timing that uses the Dow and the transportation index together.  When both have a lower high and a lower low, then they turn into a sell.  When both have a higher low and a higher high, then they turn into a buy.  Right now the market is still a buy.

2)      Bullish Percent Index: uses a sector or industry to look for 70% over bought or 70% over sold as a threshold for mean reversion.  If 70% of stocks in a sector are a Point and Figure buy, and THEN reverse below 70%, you go into a sell.  If 70% are a sell and THEN reverse – you go into a buy.  www.DorseyWright.com is the best source for these kinds of charts.

3)      Congressional Effect: basically you invest when Congress is in recess, and hold bonds when they are in session.

4)      Sell in May: (and buy in November).

5)      Hedging: you don’t time at all, but rather try to pick stocks that will outperform the market AND short the market at the same time.  Gargoyle Strategic is the best hedge fund that I know.

6)      Sector Rotation: my own approach.  I don’t time long or short, but simply look for the most likely sector and let it ride until another sector takes its place.

7)      Fundamental Investing: a good set of models for this are at www.Validea.com.

Keep in mind that anything that YOU know about is also known by those pesky black box algorithms trading against you.  What you really need is something that no black box can beat, which would be – long, all the time.  The high frequency trading algorithms are TRADING algorithms.  If everyone were all long, all the time, those algorithms would have no humans to devour.  They would just cannibalize each other until they all died out.

Of course that won’t happen, but it’s a nice thought anyhow.  And the three strategies that would kill the black boxes are Hedging, Sector Rotation, and Fundamental Investing.

My Sector Model does Sector Rotation.  My Full Model combines Sector Rotation and Fundamental Investing.

I don’t hedge, but I’m not rich enough to need to.

Regardless of your style, it has to be consistently applied.  My Full Model was drastically down only a few weeks ago.  My entire portfolio has gained 25% during October through a combination of 4 models (two of which I discuss on the blog, and two that I keep to myself).  I use these consistently, so that I won’t miss the times that the market pops back in my favor.

Plan your trades, and trade your plan.  Don’t let the market dictate.  You define YOUR terms and wait for the market to come to you.  They say that a stopped clock is right twice a day.  That’s true for a consistent strategy as well.  If you can hold until you are right, then you can sell when you are right instead of when you are wrong.  If you time, flip from one strategy to another, trade emotion, or over leverage, you won’t make it to the long term, but get wiped out long before.

Tim