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 several simple systems using the S&P500from 1950 to 2008 as proxy (1st table with Dividends excluded and 2nd table with Dividends included). You can get a more detailed description by clicking on each strategy.



Strategy Average Return Annualized Return Standard Deviation   %Positive Years Min Return Max Return %time invested
Buy And Hold 8.4% 7.0% 17.1% 73% -38.5% 44.2% 100%
50&200 Days Moving Averages 8.0% 7.3% 12.3% 76% -15.2% 44.2% 69%
Combined Monetary & President Cycle 7.5% 6.2% 12.9% 93% -38.5% 34.1% 60%
Optimized Monetary & President Cycle 9.4% 8.7% 12.3% 90% -38.5% 34.1% 68%
Best 6 Months 6.7% 6.1% 10.7% 70% -18.4% 28.5% 50%
Best 6 Months + MACD 8.7% 8.2% 10.4% 78% -9.1% 41.0% 52%
President Cycle 6.1% 5.5% 11.6% 95% -38.5% 34.1% 50%
Combined Best 6 Months & President Cycle 8.1% 7.2% 13.4% 70% -38.5% 34.1% 75%
Combined Best 6 Months & President Cycle (variation 2) 7.4% 6.7% 12.0% 75% -38.5% 34.1% 63%
Combined Best 6 Months + MACD & President Cycle 9.4% 8.6% 12.9% 80% -38.5% 41.0% 76%
Combined Best 6 Months + MACD & President Cycle (variation 2) 8.0% 7.3% 11.8% 80% -38.5% 34.1% 63%
S&P500 (Dividends excluded) from 1950 to 2008





Strategy Average Return Annualized Return Standard Deviation   %Positive Years Min Return Max Return %time invested
Buy And Hold 11.8% 10.4% 17.5% 76% -36.4% 49.9% 100%
50 and 200 Days Moving Averages Crossover 12.0% 11.4% 12.3% 86% -9.5% 49.9% 69%
Combined Monetary & President Cycle 11.6% 10.1% 12.8% 95% -36.4% 37.0% 60%
Optimized Monetary & President Cycle 12.6% 11.8% 13.0% 95% -36.4% 37.0% 68%
Best 6 Months 10.8% 10.3% 10.8% 85% -13.7% 33.7% 50%
Best 6 Months + MACD 12.8% 12.3% 10.4% 88% -3.6% 44.0% 52%
Year 3&4 President Cycle 10.3% 9.7% 11.7% 97% -36.4% 37.0% 50%
Combined Best 6 Months & President Cycle 11.9% 11.0% 13.4% 85% -36.4% 37.0% 75%
Combined Best 6 Months & President Cycle (variation 2) 11.3% 10.6% 12.2% 86% -36.4% 37.0% 63%
Combined Best 6 Months + MACD & President Cycle 13.2% 12.4% 13.0% 88% -36.4% 44.0% 76%
Combined Best 6 Months + MACD & President Cycle (variation 2) 11.9% 11.2% 12.1% 88% -36.4% 37.0% 63%
S&P500 (Dividends included) from 1950 to 2008
more details at Market Timing performances methodology





As you can see, all simple timing systems have lower volatility than Buy And Hold and several strategies have better annualized returns.

Apart from the Presidential Cycle system, all strategies have better risk adjusted returns than Buy and Hold.

Only the "Best 6 Months" (including the variant with MACD) and the "moving averages crossover" systems escaped the great 2008 Bear Market as they were in Sell Mode in Sept-Oct 2008. The other strategies show the same depressing -38.5% (-36.4% with dividends) minimum annual return in that fateful 2008.

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