Wednesday, February 22, 2017

Market Timing Is Out Of Favor -- So Is A Stock-Market Top Near?

What the Market Timing Popularity Cycle says about the current market.

MarketWatch
February 22, 2017



Market timers are struggling. And that means a market top could be imminent.

That’s because of a decidedly unscientific indicator that I created two decades ago called the Market Timing Popularity Cycle. It’s based on the distinct tendency for market timing to reach the point of greatest popularity at stock-market bottoms (when advisers confidently pronounce that “buy and hold is dead”) and to become least popular at market tops (when buy and hold makes a big comeback).

And market timers are indeed struggling. In fact, in my four decades of tracking the industry I have hardly ever witnessed market timing to be more out of favor than it is now.

To illustrate, consider perhaps the most widely used technical indicator that market timers use to determine that we’re in a major bear market: the stock market breaking its 200-day moving average. When this happened to the S&P 500 SPX, +0.60% last June, however, the break marked the end of the market’s decline, not the beginning. The market immediately shot back up, as the chart above shows.

The same thing happened last November in the hours after it became clear that Donald Trump would win the election.

Of course, many market timers focus on a myriad of different indicators besides the 200-day moving average, and not all of them have struggled. But the vast majority have. One of the advisory industry’s most successful timers recently told me that “2016 was the worst year of my 35-year career!”

To be sure, the Market Timing Popularity Indicator can’t be used as a precise market-timing indicator, since measuring market timing’s popularity is not an exact science. However, I did get lucky on two prior occasions of using the Indicator to pinpoint changes in the market’s major trend:

•On March 2, 2009, one week before the bottom of the 2007-2009 bear market, I wrote a column on market timing’s new-found popularity in which I concluded that “the final low may be closer than we think.”

•In March 2003, I devoted a column to the conversion of a prominent believer in buy-and-hold into a market timer. I wrote that “we’re closer than ever to the final low of the 2000-2003 bear market.” That column appeared on March 11, 2003, the day the market retested the bear-market low that had been hit the prior October and then turned higher.

Undoubtedly I will not always be so lucky. So you should take with a healthy grain of salt my current interpretation of the Market Timing Popularity Cycle.

Still, it should give us all pause that past major market tops were accompanied by market timing being as unpopular as it is today.


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