I have no idea what the previous graph was, but I would agree that it is possible to time the markets to an extent. It is impossible to say the market is definitely going up or definitely going down, or to guess what the direction will be in two weeks.
However shorter term I believe it is possible to say the market is more likely to move in a particular direction. I use the following indicators to time the markets :
1) In a down market, ignoring great news with absolute pessimism is a sign of a bottom. eg. Last October when greenspan indicated that rates would be falling, the dollar dropped by 10% (the high dollar, although not the cause of the asia problem was the catalyst) and yet the market nosedived. This needless to say was a fairly obvious bottom to clean out all sellers.
2) In an up market, ignoring extremely bad news with optimism is a sign of an approaching top. This is not as reliable. An example of this was last year when the Nasdaq hit 7 consecutive highs while Asia and the rest of the world collapsed.
3) An unweighted index of stocks dropping for 2 weeks indicates the probable start of a correction. Normally small cap stocks start to drop prior to the large caps. Unfortunately this is masked by most indexes since any movement by Microsoft etc. will dwarf the combined movements of a thousand smaller stocks. The nearest I can find to an unweighted index is VectorVests average stock price. This is not perfectly unweighted since a $100 stock has effectively ten times the weighting of a $10 stock, but still does the job.
4) Breadth of the market (ratio of number of advancing stocks/declining stocks) is a very important indicator of the true direction of the market. If you have an up day but decliners are higher than advances then a downmarket is still in place. Breadth is really another way of looking at 3), since it tells you which way the average stock is moving.
5) Intraday patterns. If the stock market jumps in the morning and drifts down through the day this is a sign of a down market. Even if the market ends up higher than the previous day. If this pattern continues over a few days the market is going down. Likewise the reverse, drifting up through the day, especially over a few days in a row is a sign that the market is going up.
6) A lot of turnaround days have a huge jump or drop in the morning, followed by a reversal throughout the afternoon. Combined with high volume this is a very good indicator of a possible reversal.
7) A lot of turn arounds in the market direction, especially the beginning of correction seem to happen towards the end of the tech earnings period, around about the 3rd week of the month. This is may just be a recent fluke, I don't know.
8) Big events in the future could cause a change of the market directions. Problem is guessing how early people start to anticipate and bid up (or down) the market. When microsoft releases an operating system, people start getting excited about it and the market starts going up. With win95 people started anticipating it 5 months ahead, causing a bull market in technology. With win98, it wasn't until a week beforehand that people finally began to get interested and thought, "a new operating system from MS, this is bound to sell a few more computers and be good for techstocks". As far as bearish events, a lot of people on this thread are expecting anticipation of y2k problems to cause a market slide later in the year.
Using the above I have done a pretty good job of timing the market. Like I said the only call that can ever be made is that there is a higher probability of the market going in a particular direction. Depending on whether I think the market is going up or down I change my portfolio to slightly bullish or slightly bearish.
The only major misses I made in the last year and a half was been not anticipating the length of the previous tech rally. I picked the bottom and turnaround, but soon after ignored the above indicators to go back to a neutral/slightly bearish bias. I have been fully bearish for the last 4 weeks, and will stay that way until the breadth and unweighted stock indexes start becoming positive.
Graeme |
