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rintintin
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Timing the market
I know timing the market is taboo to most investors. A fools errand it is. We simply can't predict what it's going to do day in and day out. Many professionals, and some of the best investors of all time abide by the "hold through thick and thin" rule.

Given that, for shits and giggles, I decided to do my own little (very unscientific) study to see if there was any advantage to jumping in and out of the market based on a simple benchmark. I've never read or seen any studies of such. I'll precede this by saying I did this in about 20-30 minutes using Google finance, so this is far from thorough.

That being said I think the results are pretty staggering.

Looking at the S&P 500 chart since 1974, I calculated returns of $10,000 if you were to jump in and out of the S&P when it passed it's 50 week moving average. So when it dipped below the 50 wk MA by about 5% you jumped out of the market, then jumped back in when it went above it's 50 wk MA by about 5%. I say about 5% because I waited for a substantial move past the 50 wk MA. It wasn't exactly 5%, but you get the picture.

So the returns are as follows:

Holding $10,000 through thick and thin since 1974, you would currently have about $182,400.

If you were to jump in and out at the 50 wk MA, you would currently have about $406,597.

Now I understand that this time frame includes 2 of the biggest market declines in history, which would give a big advantage to someone who jumped out before the tech and housing bubbles. But I don't think such big market declines are things of the past, and I don't think it's a stretch to assume we could see a few more over the next 40 years.

By no means am I advocating this strategy, and I'm sure I'll get bashed by some people here for even hinting at the notion. But I think the results are discussion worthy.


The Mick
LSU Fan
Member since Oct 2010
39396 posts

re: Timing the market
I'd like to see the figures if you bought when it's below and sold when it's above. That's the general goal of playing stocks.


PS maybe I'm dumb but if you buy in at a higher value then sell at a lower value how can your study be possible?
This post was edited on 3/16 at 7:20 pm


rintintin
New Orleans Saints Fan
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re: Timing the market
I would think numbers would be much more impressive, but the question that arises is at what percentage above do you sell?


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rintintin
New Orleans Saints Fan
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re: Timing the market
The 50 WK moving average is on an upward trajectory due to the markets historical positive performance. You're not selling at a lower value. It's a long time frame.

PS. This is using a logarithmic chart.
This post was edited on 3/16 at 7:26 pm


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foshizzle
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Washington DC metro
Member since Mar 2008
40599 posts

re: Timing the market
It's great you've figured out a strategy that would have worked in the past. But what will work in the future?


rintintin
New Orleans Saints Fan
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re: Timing the market
Can we not look to the past to make educated guesses about the future?

I could argue that the stock market is as much a psychological measure as it is an economical measure, and studying past behaviors could be helpful in determining future performance.


foshizzle
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Washington DC metro
Member since Mar 2008
40599 posts

re: Timing the market
quote:

Can we not look to the past to make educated guesses about the future?


Sure. But why do you believe this particular guess is an educated one? It seems pretty simplistic to me as technical analysis goes.

Why did you pick 1974 as the starting point? Does this method work in other periods also? And why 5% as opposed to some other number? What was the maximum loss during this time? Etc. etc.

Because one thing's for sure - some bright young analyst at Goldman Sachs or the like did this analysis a long time ago.


kingbob
LSU Fan
Sorrento, LA
Member since Nov 2010
50660 posts

re: Timing the market
I would be interested to see the results of such a study.


foshizzle
LSU Fan
Washington DC metro
Member since Mar 2008
40599 posts

re: Timing the market
It might indeed be interesting - not saying the OP is totally wrong but just that there's more to developing something substantial than just looking at total return over an arbitrarily-chosen period.

We also need to look at things like maximum downdraw, for example. In other words, when things didn't work how bad was it? How much of good performance can be attributed to just four or five trading days? That sort of thing.

For example, if you could find a trading strategy that only gained half as much over the same period but never lost a single day, that could be a better way to go even though returns are only half. Why? Because if you never suffer serious losses you can leverage with more confidence and do much better.

In theory, of course.


rintintin
New Orleans Saints Fan
Life is Life
Member since Nov 2008
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re: Timing the market
quote:


Sure. But why do you believe this particular guess is an educated one? It seems pretty simplistic to me as technical analysis goes.


I by no means think my simple little study was thorough enough to draw any concrete conclusions. But I think the simplicity of it, coupled with the enormous differential in gains is something to think about. I wouldn't find it far fetched that some average Joe trader has used such a strategy because of its simplicity, and yet he would've substantially outperformed many professionals. Sometimes the simplest of things can be the most telling.

quote:

Why did you pick 1974 as the starting point? 


That's an easy one, it's the furthest back Google finance would go . I just wanted to see how it would work over the longest possible timeframe.

quote:

Does this method work in other periods also? 


I would assume its massive outperformance is mainly due to 1987, 2001, and 2008, which were some of the largest market declines the market has ever seen. I noted that in my OP. Basically this strategy avoids the massive losses that happen during bubbles and such. And I also said I don't think it's far fetched to think we could see a couple more such bubbles over the next 40 years, which is why this strategy could possibly outperform the market in the future.

quote:

What was the maximum loss during this time? Etc. etc. 


Actually, I don't recall there ever being a time period of loss, maybe a couple of percentage points here and there but nothing substantial. Sure there were long stretches where zero gains were made, and even others where some gains were missed, but it was still a positive outcome because you avoided the huge losses. Simply because the 50 WK MA is still a very long time horizon, and the upward trajectory only broke a few times during the big bubble bursts. When the upward trajectory did break, you were able to get back in at a lower price point because of the huge market decline, thus increasing your gains.

I think over the whole 40 year period you would actually jump in and out only about 20 times. I need to look at my sheet for the exact number, but it wasn't a very consistent happening. Sometimes 5 to 6 years would go by before a move had to be made.

quote:

ecause one thing's for sure - some bright young analyst at Goldman Sachs or the like did this analysis a long time ago.


I'm sure of it, but I've never seen one published which is why I did it.
This post was edited on 3/17 at 9:42 am


rintintin
New Orleans Saints Fan
Life is Life
Member since Nov 2008
14551 posts

re: Timing the market
quote:

We also need to look at things like maximum downdraw, for example. In other words, when things didn't work how bad was it?


I can tell you that when things didn't work out as you say, it was not bad at all considering you never really lost a substantial amount. The only losses came when the market quickly declined after an initial rebound over the 50 wk MA, which was not many. Staying out for the majority of the bear markets and bubble bursts easily made up for those losses.

The big disadvantage to this strategy would be losing out on some gains waiting for the price to move past the 50 wk MA. But again, staying out during the really bad bear markets easily made up for it.

quote:

How much of good performance can be attributed to just four or five trading days?


There weren't certain days that made up the majority of gains, it was more like certain years. You weren't jumping in and out of the market on a day to day basis. The biggest gains came from the years immediately following bear markets and bubble bursts, when you were able to avoid the big loss and get back in at a lower price point.

As I said, this is still a long term hold strategy. And I will say that it would probably only work over a long time span, 30-40 years or so, where it is inevitable that will see major bear markets and declines.

For instance, I'm sure during the long 90's bull market, simply staying in the market would've outperformed this strategy by a bit. The 50 wk MA stayed on an upward trajectory for the entire decade, and the price only dipped below it a few times. Thus jumping out of the market on such declines and jumping back in when the price again passed the 50 wk MA, you would have missed out on some gains.
This post was edited on 3/17 at 10:05 am


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S
Texas Southern Fan
RIP Wayde
Member since Jan 2007
106732 posts

re: Timing the market
have you read 'way of the turtle'? there is a fascinating chapter about developing formulas on when to get in and out of trades


rintintin
New Orleans Saints Fan
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Member since Nov 2008
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re: Timing the market
No I haven't, but I will check it out. Most of the literature I've read is heavily against trying to time the market. I'm the type that likes to look at all points of view though before taking a stance.

Whether you agree with it or not, seeing all angles is paramount to making intelligent decisions IMO.


Cold Cous Cous
LSU Fan
Bucktown, La.
Member since Oct 2003
14874 posts

re: Timing the market
Interesting. What do the #s look like if you do 3%, 4%, 6%? In other words, is this just a quirk of having chosen 5% as the number, or does it hold true (more or less) at other numbers as well. Although with 3% you might be jumping in & out at a dizzying rate.


rintintin
New Orleans Saints Fan
Life is Life
Member since Nov 2008
14551 posts

re: Timing the market
quote:

What do the #s look like if you do 3%, 4%, 6%? In other words, is this just a quirk of having chosen 5% as the number, or does it hold true (more or less) at other numbers as well. 



As I said in my OP, this wasn't highly scientific, or even very precise. I didn't use exactly 5%. Sometimes it could've been 5%, other times 3%, and even others 8%. But the massive out performance is what got my attention.

I'm sure 1 or 2 percentage points would create much different final numbers, but I am certain you would've still beat the market. Like I said in one of my previous posts, the major gains came shortly after the big bear markets and bubbles. You were gaining an extra 30-50% during these periods. A couple of percentage points would not have changed the general outcome, which was beating the market.
This post was edited on 3/17 at 1:24 pm


rintintin
New Orleans Saints Fan
Life is Life
Member since Nov 2008
14551 posts

re: Timing the market
DP
This post was edited on 3/17 at 1:23 pm


oldschoolgreats
LSU Fan
Member since Nov 2012
1902 posts

re: Timing the market
this all makes good sense to me. the real question for me is how does this work for 5 or 10 year periods. from 1974 to 2014 is way too long to use as one period.


Shepherd88
Member since Dec 2013
2772 posts

re: Timing the market
So just to clarify, at which point percentage in your calculation did you decide to sell? Was it right when the market turned south or was it a certain percentage it hit?

Realistically, your going to have to have a target percentage it hits everytime and stick with it.


rintintin
New Orleans Saints Fan
Life is Life
Member since Nov 2008
14551 posts

re: Timing the market
quote:

 the real question for me is how does this work for 5 or 10 year periods. from 1974 to 2014 is way too long to use as one period. 


It's a long term strategy. 30-40 years is a good time horizon for a young person until retirement.

To answer your question it would work terribly during a bull market run, but quite well if a bear market or bubble was within that 5-10 year window, which is why this is a long term strategy. You almost assuredly will witness severe bear markets over the course of 40 years. 5-10 years it's a crap shoot.
This post was edited on 3/17 at 2:32 pm


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rintintin
New Orleans Saints Fan
Life is Life
Member since Nov 2008
14551 posts

re: Timing the market
quote:

So just to clarify, at which point percentage in your calculation did you decide to sell? Was it right when the market turned south or was it a certain percentage it hit? 


A few percentage points below the 50 week moving average. So it was usually a substantial downturn before you sold. And occassionaly rebounded rather quickly, in which case you could miss out on some gains.

quote:

Realistically, your going to have to have a target percentage it hits everytime and stick with it.


Yes, and I wanted to be more precise by picking a target percentage, but it would've been much harder and took much longer. I was hurting too bad from the St. Paddy's day parade the previous day to exert that much effort .

Maybe I'll do it much more thoroughly soon when I have time.


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