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Market Timing - Skill or Luck?

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[OP]
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Market Timing - Skill or Luck?

Do you want to time the market? Perhaps the discussion should shift to an approach that is logical, mechanical and that it could have your plan validated, at least in the past, by backtesting it. The key is not to look "what" worked, but instead, "why" it worked. If the theory is solid, regardless if it's based on fundamentals (why things move this way) or techcnical analysis (what we observe), it has a great chance to continue to work in the future. To me, this is a more reasonable approach to consistently and successfully time the market, and not simply gamble with it.

The article below has one good example for a market timing model based on economic data to buy just a few ETFs and rotate them as conditions change.

Backtests results are a nice 12% annualized with -25% worst drawdown being invested all times as per the same rules - no hedging required.

http://seekingalpha.com/article/3982436 ... -investors

This model is also publicly available to portfolio123 members, so anyone can implement it.

Focus on the rules and reasons behind, not on the result itself (you want positive alpha, not a pretty backtest).

This approach takes emotions, gut-feeling and luck out of the equation and can producesomething where you can actually put real money down without worrying when drawdown occurs - because it's been backed up by a solid and tested idea.

In my opinion, this is how market timing can work. Consistently. And no gambling. The article above is just one idea. There are tons more that could be applied to help one minimize drawdowns.

Rod
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Sep 6, 2010
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Interesting, like one comment mentioned it is sort of like a blackjack strategy which I use, not for me I will use that strategy at the casino with fun money.
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Why try to move tactfully in and out, hoping to beat the market? What's wrong with just buying and holding? Perhaps it's my personality, but I find pursuing something that requires extra time and work not worth the extra effort.

Furthermore, screening, researching and then actually deciding to buy particular stocks is hard enough already, why add an extra layer of complexity on top, when after trading costs you may just under preform? Not for me!
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Feb 16, 2013
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rodbarc wrote: The article below has one good example for a market timing model based on economic data to buy just a few ETFs and rotate them as conditions change.

Rod
Even if it is rule based model, economic data is always uncertain and anything can happen in real time
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Sep 20, 2014
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Interesting but I remain skeptical. For one, the data it relies on (unemployment figures, EPS etc.) can often change significantly with the evolving dynamics of an economy. Case in point...the current low interest rate environment. It has likely added a bit to the EPS figures of major corporations thanks to the extra liquidity being pumped in by the central banks. I get what they're trying to do. Have 4-5 indicators that estimate the likelihood of a market crash (rising unemployment signalling a weak economy, for instance) but there are some obvious pitfalls.

I also don't know how well the "alpha modelling" works. Discipline is one thing but I still remain very skeptical of a strategy that can estimate things correctly looking forward. Backtesting does make this sound like a feasible idea but then again, that is sort of becoming the point of backtesting.

Still, interesting.
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treva84 wrote: Why try to move tactfully in and out, hoping to beat the market? What's wrong with just buying and holding? Perhaps it's my personality, but I find pursuing something that requires extra time and work not worth the extra effort.

Furthermore, screening, researching and then actually deciding to buy particular stocks is hard enough already, why add an extra layer of complexity on top, when after trading costs you may just under preform? Not for me!
Absolutely, and I'm a buy and hold investor too. Market timing is to help trading, not investing. Trading doesn't replace investing, but I think it can complement for the short term. But trading and investing are very different.

Rod
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saturnfan wrote: Even if it is rule based model, economic data is always uncertain and anything can happen in real time
I agree, no wonder it has an average winning ratio, even if it beats the market.

Rod
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pulkit10 wrote: Interesting but I remain skeptical. For one, the data it relies on (unemployment figures, EPS etc.) can often change significantly with the evolving dynamics of an economy. Case in point...the current low interest rate environment. It has likely added a bit to the EPS figures of major corporations thanks to the extra liquidity being pumped in by the central banks. I get what they're trying to do. Have 4-5 indicators that estimate the likelihood of a market crash (rising unemployment signalling a weak economy, for instance) but there are some obvious pitfalls.

I also don't know how well the "alpha modelling" works. Discipline is one thing but I still remain very skeptical of a strategy that can estimate things correctly looking forward. Backtesting does make this sound like a feasible idea but then again, that is sort of becoming the point of backtesting.

Still, interesting.
These are good points. I'll check this model from time to time (not with real money) just for fun, and see how well (or not) it could switch before the next prolonged crash. Specially considering that every recession is triggered differently. It's a different driver than pure technical analysis (for example, to switch to bonds when EMA(200) is below EMA(50)).

Rod
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The fundamental point is that somebody needs to bet against this strategy (or any timing strategy) for it to work. Therefore, timing the market is always a zero sum game.

I don't think it's a skill per se, it's an art. Some people are good at it, some people are not.

One thing for sure, it can be fun due to the adrenaline. So much like gambling, trading can be a hobby, but for most people, it's not to be depended on.
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Sep 1, 2013
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While the process is correct (i.e. research, backtest, simulate, and then deploy), the underlying metrics (price, headline economic figures) are widely available to anyone. There is no edge or competitive advantage here. Certainly not after it has been posted on a public website.

Most professional investing these days is rules-based, so that bit is a good point.
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treva84 wrote: Why try to move tactfully in and out, hoping to beat the market? What's wrong with just buying and holding? Perhaps it's my personality, but I find pursuing something that requires extra time and work not worth the extra effort.

Furthermore, screening, researching and then actually deciding to buy particular stocks is hard enough already, why add an extra layer of complexity on top, when after trading costs you may just under preform? Not for me!
Extra effort - more cash in account
What is ccp portfolio return in the last 2 years? Single digits or negative?
It's easy to grin when your ship comes in and you've got the stock market beat.
But the man worthwhile is the man who can smile when his shorts are too tight in the seat 😃
In Fed We Trust - Make ES Limit Down Great Again!
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Archanfel wrote: The fundamental point is that somebody needs to bet against this strategy (or any timing strategy) for it to work. Therefore, timing the market is always a zero sum game.
Not true. Fear is always mispriced. Which product has emotions as part of its derived value? Options. Options are not zero sum game
It's easy to grin when your ship comes in and you've got the stock market beat.
But the man worthwhile is the man who can smile when his shorts are too tight in the seat 😃
In Fed We Trust - Make ES Limit Down Great Again!
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Archanfel wrote: The fundamental point is that somebody needs to bet against this strategy (or any timing strategy) for it to work. Therefore, timing the market is always a zero sum game.
Nobody needs to beat against any strategy. I believe there are a few reasons to why the market misprice stocks - hence the market could be undervalued or overvalued. It's never priced right all the time.

For example, take a simple market timing rule to go bonds when the majority of SP500 companies revise earnings negatively, and resume back to stocks. Price takes time to follow earnings, so this could give someone an edge while at the same time using information that is available to everyone - it's all about knowing why things move the way they do. Here is 16-year backtest using IJR (small-cap ETF) and switching to IEF (mid term bond) and back:

Image

Image

The model is currently in IJR and will switch to IEF when my Graham model switches to cash. Time will tell how efective that will be.
Archanfel wrote: I don't think it's a skill per se, it's an art. Some people are good at it, some people are not.
While I agree that there's a talent component, a lot of that could be learned. And like you said, fun is a great motivation for this.

Rod
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rodbarc wrote: For example, take a simple market timing rule to go bonds when the majority of SP500 companies revise earnings negatively, and resume back to stocks. Price takes time to follow earnings, so this could give someone an edge while at the same time using information that is available to everyone - it's all about knowing why things move the way they do.
The bolded part is what matters. That bit is not available to everyone - and you need to conduct research to gather it.

In this specific example, the securities being traded will run into the scale issue at the institutional level.

Does portfolio123 allow you to perform simulation using historical data?
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Ironcat wrote: The bolded part is what matters. That bit is not available to everyone - and you need to conduct research to gather it.

In this specific example, the securities being traded will run into the scale issue at the institutional level.

Does portfolio123 allow you to perform simulation using historical data?
Yes, that's one of their main feature.

Rod
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dlhunter wrote: Extra effort - more cash in account
What is ccp portfolio return in the last 2 years? Single digits or negative?
10.5% in 2014, 7.5% for 2015. 18% in 2 years. Not bad for just doing nothing IMO :)
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asa1973 wrote: 10.5% in 2014, 7.5% for 2015. 18% in 2 years. Not bad for just doing nothing IMO :)
Single digits as I said. 2015 return of 7.5% implies aggressive portfolio with all equities. Pat yourself on the back, and let's see how 2016 treats you in December.
It's easy to grin when your ship comes in and you've got the stock market beat.
But the man worthwhile is the man who can smile when his shorts are too tight in the seat 😃
In Fed We Trust - Make ES Limit Down Great Again!
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dlhunter wrote: Single digits as I said. 2015 return of 7.5% implies aggressive portfolio with all equities. Pat yourself on the back, and let's see how 2016 treats you in December.
7.5% was for BALANCED portfolio of 60/40

TD e-Series funds

Conservative Cautious Balanced Assertive Aggressive
30% equities 45% equities 60% equities 75% equities 90% equities
5.26% 6.36% 7.45% 8.55% 9.65%
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Many small hits @ skill, few big hits @ luck.
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dlhunter wrote: Extra effort - more cash in account
What is ccp portfolio return in the last 2 years? Single digits or negative?
Who cares about 2 year returns...keep drinking the short term trading koolaid just because you might be having a good run, I tend to agree the vast majority of retail traders their efforts ARE close to a zero sum game, you cannot beat the big money and algos. Fighting the tried and tested long term(not 2 years) approach is truly the only way an everyday joe investor can beat or match market returns over time. Period.

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