If you are an investor, the best time to invest is now. If are evaluating individual business, what matters is valuation, and there are always bargains to be found. If you invest in the whole market, then dollar cost average is your best approach, since you can't control the companies when you buy the whole basket anyway (and you'll be paying market price for that whole basket). Market timing works but it's irrelevant when investing, because market timing goals are to allow one to lock profits soon and minimize losses. That's not the investor mentality. Investing is about partnering with business for a long term - if the market crashes, you add more. That's the hardest part for many, when every media channel is telling you to sell everything, "because it will get worse".
If you are trader, it's a whole different story, and market timing does work. I can give several examples with data to back it up. There are research papers, books and out-of-sample data since 1950 that proves that certain economic indicators are reliable to predict recessions - which drives crashes. Few examples include unemployment rate or Treasury Constant maturity spread of short and long term rates. Same thing for analyzing earnings and cash flow from all the companies of the market as a whole and see how they are trending - if earnings across the board are revised lower, stock prices are likely to drop in general. Same thing for technical analysis, where known patterns and indicators can allow one to be in fixed income during volatile times. Speaking of volatility, technical analysis alone is enough to generate over 33% annualized returns since XIV's inception, considering how volatility index is constructed and how trend analysis can identify when it switches from contango to backwardation and vice-versa. When trading (not investing), market timing works and is fundamental when doing directional (non market-neutral) trades. To anyone wondering the famous "luck vs skill" debate, these are well defined methodologies that works as a mathematical / algorithmic strategy, with decades of data to support it - essentially eliminating the luck factor.
Since 1999 SPY's annualized return is 5.42% (and -54.6% max drawdown). A market timing system using the rules above, which is either long SPY (when bullish on the market) or IEF (mid-term bonds, when bearish on the market) produced ~ 13% annualized returns, and less than -20% max drawdown. Mathematical / algorithmic system.
Few publications if anyone is interested:
- Brock, W., Lakonishok, J., LeBaron, B., 1992, “Simple Technical Trading Rules and the Stochastic Properties of Stock Returns,” Journal of Finance 47, pp. 1731-1764.
Carhart, M. M., 1997, “On Persistence in Mutual Fund Performance,” Journal of Finance 52, pp. 57–82.
- Fama, E. F., French, K. R., 1992, “The Cross-Section of Expected Stock Returns,” Journal of Finance 47(2), 427–465
- Glabadanidis, P., 2012, “Market Timing with Moving Averages”, 25th Australasian Finance and Banking Conference.
- Glabadanidis, P., 2012, “The Market Timing Power of Moving Averages: Evidence from US REITs and REIT Indexes”, University of Adelaide Business School.
- Lo, A., Mamaysky, H., Wang, J., 2000, “Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation,” Journal of Finance 55, 1705–1765.
- Pesaran, M.H., Timmermann, A.G., 1995, “Predictability of Stock Returns: Robustness and Economic Significance”, Journal of Finance, Vol. 50 No. 4