Market Timing

Market Timing tries to identify periods when, based on historical evidence, it is favorable or unfavorable to invest in the Stock Market. The objective is to be more invested during favorable periods and less invested during unfavorable periods.

Numerous systems have been developed, most of them mechanical. Mechanical systems allow backtesting which is a rule with Market Timing: no system is used without backtesting.

Although most timing systems are simple, Market Timing can be a difficult investment strategy to follow.

In fact, Market Timing requires great control of one’s emotions. No system is perfect; at some point, any timing system will inevitably be wrong for some time (sometime a pretty long time). This is when your nerves will be at test and when many will abandon the system, only to see it producing great results afterwards.

In addition, many timing systems are contrarian: they want you to Buy when the Market seems doomed and want you to Sell when the Market looks unstoppable. This can be extremely challenging if you're affected by the Herd Mentality.

One way to deal with this is to use several Market Timing systems and get progressively more invested (less invested) as each system flashes its Buy signal (Sell signal).


Market Timing systems can be classified in different groups.

Some of these systems are trend anticipation (Monetary, Economic, Sentiment, Valuation), others are trend followers (Technical Analysis). Calendar systems are neither trend anticipation nor trend follower. As you can see, many systems are trend anticipation, meaning they are contrarian.

It is unlikely that all systems would be wrong at the same time for an extended period, even different trend anticipation systems will give different signals. Similarly to Asset Allocation, by combining several Market Timing systems, your can reduce risk. See How to build a successful Market Timing system.

Market Timing Performances Go back to Top

The following table summarizes Market Timing performances for simple systems based on S&P500 (Dividends excluded) from 1950 to 2004. You can get a more detailed description by clicking on each strategy.

Note: You may think that excluding dividends is unfair to Buy and Hold because you will reap all dividends while a timing system 50% in the market would logically get only about 50% of dividends. That's definitely true but when your Market Timing is out of stocks, it earns interests in Money Market or Short Term Bonds. Dividend yields are often lower than what you would get in Money Market and Short Term Bonds, therefore ignoring dividends is not a big deal.


Strategy Average Return Standard Deviation   Positive Years   Min Return Max Return #signals per year %time invested
Buy And Hold 9.4% 16.6% 71% -28.1% 47.3% 0 100%
50 and 200 Days Moving Averages Crossover 7.9% 13.0% 74% -18.1% 47.3% 1 69%
Combined Monetary & President Cycle 8.5% 11.6% 94% -12.3% 35.2% 0.5 62%
 Optimized Monetary & President Cycle 10.7% 11.2% 90% -12.3% 35.2% 0.6 68%
Best 6 Months 7.3% 10.8% 71% -18.4% 30.7% 2 50%
Year 3&4 President Cycle 7.0% 10.1% 96% -11.8% 35.2% 0.5 50%
Combined Best 6 Months & President Cycle 9.1% 12.1% 73% -18.4% 35.2% 1 75%
Combined Best 6 Months & President Cycle (variation 2) 8.4% 10.4% 75% -11.8% 35.2% 0.5 62.5%





As you can see, ALL simple Market Timing systems have lower volatility and lower downside risk than Buy And Hold: that really is the objective of Market Timing. Apart from Moving Averages, all above Market Timing systems have better Sharpe ratios than Buy and Hold.

Go Back to Top