Market Timing.
Printed from DWA and their text for the brokers seminars.
This information will also be in the new PnF University soon to be released
Facts About Last Year?s Market
While the indices came back strong from the sell off in
July/August, many stocks continued to struggled and if you
were not in the top tier stocks, your portfolio suffered
some damage. (Source: Int?l Herald Tribune, Sat.-Sun.
January 23rd-24th, 1999)
According to Lipper Analytical Services, the average stock
mutual fund return 14.5% for 1998.
While the S&P 500 put in a return of 28.7% last year, if
you weighted each stock in the S&P 500 equally, the return
would only be 13.9%. The one stock, one vote concept is
similar to that of the NYSE Bullish Percent and your
client?s portfolios.
The Nasdaq Composite returned 38.5% for 1998 but more than
half the stocks in that index were down for the year.
What?s Happened So Far This Year With the Indices
Dow Jones S&P 500 Nasdaq Russell 2000
Dec. 31th 1998 9181.43 1229.23 2192.70 421.96
Jan. 29th 1999 9358.83 1279.64 2506.20 427.22
+ 1.9% + 4.1% + 14.3% + 1.2%
NYSE Comp. Nasdaq Nasdaq 100 Russell 2000
# Stks in index 2958 4799 100 2000
# Stks Within 5% 334 253 32 132
of 52 week high 11.3% 5.3% 32% 6.6%
# Stks Within 10% 706 519 47 270
of 52 week high 23.9% 10.8% 47% 13.5%
# Stks With Negative 1850 2108 36 1138
Returns so far for 1999 62.5% 43.9% 36% 56.9%
(source: Bloomberg)
The good news here is according to Yale Hirsch?s book, The
1999 Stock Trader?s Almanac, since 1939 in odd numbered
years, the phrase ?so goes January, goes the year? has held
true in every year. In other words, if January is an up
month for the S&P, then it was an up year for the index.
This is another great source of information on the stock
market. If you don?t already have a copy of this book you
can order it by calling 800-477-3400.
Why Sector & Market Timing is Important
80% of the risk in any stock can be attributed to the
market and the sector. Only 20% of the risk is in the
stock itself. (Source: New Science of Investing? by
Robert Hagen). You must be right on the market and the
sector before you can move on to analyzing the stock.
However, most people spend 80% of their time examining the
stock. If most of the risk lies in the market and the
sector you must start there. This is often why fundamental
analysts are perceived as being wrong. Their job is only
to analyze the stock. Their job is not to determine where
the market and the sector are going. Therefore, they are
only analyzing 20% of the pie. It?s your job to analyze
the other 80% of the pie and couple that with the
fundamentalist?s view.
Study published by CDA/Weisenburger in July 1996 expounds
on what a difference it makes when you?re right on the
market and the sector versus just a buy and hold strategy.
Perfect Market Timing vs. Perfect Sector Timing
vs. Buy & Hold
Buy & Market Sector
Year Hold Timing Timing
1981 $ 1,000 $ 1,000 $ 1,000
1982 1,017 1,627 1,403
1983 1,236 2,018 1,782
1984 1,514 2,438 2,088
1985 1,607 3,407 2,940
1986 2,117 4,408 3,808
1987 2,642 6,691 5,185
1988 3,077 8,197 6,189
1989 4,049 10,786 8,526
1990 3,922 12,618 9,759
1991 5,116 16,456 16,119
1992 5,504 17,707 21,925
1993 6,058 19,489 39,489
1994 6,135 21,319 44,376
1995 8,432 29,303 65,498
Jul-96 8,873 30,836 73,677
The same phenominon happens different times periods
studiesd. For instance, here?s the results of a similar
study from 1940 to 1974.
Mkt Timing Sector Timing
1940 $ 1,000 $ 1,000
1974 $104,761 $11,000,000
Of course, no one is a perfect market or sector timing
but it does show how market timing and sector timing can
make a huge difference in the performance of a portfolio.
Market Timing is a Misnomer -- It?s Really Risk Management
When people say market timing what they are really saying
is risk management. It?s just like with our NYSE Bullish
Percent. We always get questions like ?If the NYSE Bullish
Percent goes to 30% what does that mean in Dow Jones
points?? First of all, unless you own the 30 stocks in the
Dow Jones, what the Dow does is not relevant to you. What
is relevant is that the risk level has changed for the
market and you need to adjust your portfolio accordingly.
Sometimes that may mean you don?t do anything. Other
times, you may mean that you set stop loss points, take
partial profits, etc.
Saying that you want to perform with the indices is often
times not really what people want. Really what most people
mean when they say they want to be indexed is that they
want to participate on the upside but not on the downside.
If the S&P 500 is down 25% this year and your client has
asked to perform in line with the S&P 500 and you are only
down 20%, he should be slapping you on the back and giving
you referrals and every cent he has. That?s not going to
happen though. Most people want to participate in the
upside and limit the downside -- let your winners run and
limit the downside.
Here?s a quote by Mark Hulbert that really hits
home: ?The question is NOT, can you make more money timing
than ?buy and hold?? The question IS, would you stay in the
market ?buy and hold? through thick and thin? Or is the
volatility too much? If the volatility is too much, then
if timing can reduce the volatility enough to keep you
invested, it has provided a valuable service.?
The average return for the S&P 500 from 1980 to 1989 is
17.6%. However, if you missed the 40 best and worst days
during that time period your return increased to
21.3%. ?In order to be a successful risk management
investment strategy, market timing does not have to be
perfect. Despite belief to the contrary, market timing
does not target getting in and out of the market at the
absolute bottoms or tops. It does, however, strive to get
an investor?s funds out of the market before a major bear
market devastates the portfolio. Market timing?s first and
foremost priority is the preservation of capital.?
(Source: Lasting Wealth is a Matter of Timing by Sosnowy)
Buy & Hold With Specific Stocks
The buy and hold strategy can work in the right stock.
However, get into the wrong stock and your returns aren?t
as a great as you think. Just look at a comparison of five
Dow stocks below. For instance, since 1981 the average
return of Coca-Cola (KO) is 24% but compare that to an
average return of Boeing (BA) and International Business
Machines (IBM) of just 9.5% since 1981. Buying $1000 worth
of Coca-cola (KO) in 1981 is now worth $48,709. However,
if you bought $1000 worth of Boeing (BA) its only worth
$4,995. That?s a huge difference! It can make the
difference in retiring in style and retiring very simply.
Managing risk in your portfolio is a very important
process. Limiting your losses and staying on those stocks
which are showing great relative strength separates the
great accounts from the marginal ones. As we say in
Richmond, VA -- when the huntin? dog ain?t huntin? no more,
you gotta trade him on trade date!
KO BA IBM MCD GE
1981 - 1998 Return 4773% 400% 443% 3093% 2565%
1981 - 1998 Avg. Return 24.0% 9.5% 10.0% 20.0% 21.0%
$1,000 Invested on $48,727 $4,995 $5,433 $31,925 $26,646
Dec. 31, 1980
(returns don?t include dividends)
Time Line of Events
25-Mar-87 The NYSE Bullish Percent hits a high of 77.2%
Index in the high risk area, well above the 70%
mark. Percent of 10 had reversed down from
90%.
1-Apr-87 NYSE High-Low Index reverses down to 90
after hitting a high of 96%. Both short
term indicators are negative. NYSE Bullish
Percent has fallen to 71.7% and getting
close to reversing down.
15-Apr-87 The NYSE Bullish Percent reverses down
below 70% and goes to Bear Alert status.
Current reading is 56.9%. Both the short
term and the long term indicators are on
defense.
6-May-87 Percent of 10 reverses up from below 30% as
does the NYSE High-Low Index. Expect to see
a narrow, short term rally with the short
term indicators back on a buy signal but
the NYSE Bullish Percent still in O's.
17-Jun-87 The NYSE Bullish Percent reverses up to a
column of X's at 58%. The short term
indicators Percent of 10 and the NYSE High
Low Index, are above the 70% mark.Offensive
team is back on the field.
9-Sep-87 The NYSE Bullish Percent reverses down into
a column of O's. Percent of 10 and the NYSE
High-Low Index were already on sell signals.
Both the long term and short term indicators
are on defense.
4-Nov-87 NYSE Bullish Percent reverses up to Bull
Alert status and is now at 22.2%.
9-Dec-87 Percent of 10 reverses up to Bull Alert
status. NYSE Bullish Percent reverses down
but is at 20.50%
16-Dec-87 NYSE Bullish Percent reverses up to Bull
Alert at 26.9%.
23-Dec-87 NYSE Bullish Percent goes to Bull Confirmed
status at 30%.
6-Jan-88 NYSE High-Low Index reverses up to Bull Alert |
