Market Timing. Posted with permission from DWA.
From their nightly Market Report.
dorseywright.com
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 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 in a year
ending in an odd number, 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. 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.
A 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
Notice what a huge difference it makes to time the sector right or
even the market over a buy and hold strategy.
The same phenomenon happens during different times periods
studied. 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. In other
words, they want risk management.
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%. 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)
Data On The Specific Market Indicators
Our main risk management tool is the NYSE Bullish Percent. Given
the data above, we thought you might find it useful to have in tabular
form a summary of where the different market indicators are, and
where they have topped out in the past. With respect to the column
marked '98 High, we have used those levels (highs) prior to the
market correction in August-October. In some cases, the "Recent
High" will have been made in late 1998 (November) - this is true for
both the Optionable BP and Percent of 10.
COMPARISONS
Recent
Current High '98 High '97 High '94 High '89 High '87 High
NYSE Bullish Percent: 52% 60% 72.0% 76% 66% 74% 76%
OTC Bullish Percent: 59.5% 64% 62.0% 72% 60% 60% 72%
(late '93)
Optionable Bull Per: 57.9% 71.9% 74.0% 74% 62% No Data No Data
Percent of 10: 42.5% 78.0% 72.0% 86% 70% 80% 86%
NYSE High-Low Index: 52.0% 78.6% 94.0% 96% 88% 94% 96%
OTC High-Low Index: 77.1% 82.7% 86.7% 94% 80% 84% No Data |
