Market timing: Smart or a fool's game?

"In that case you'd probably be at the top end of your allocation to stocks and at the low end of your allocation to bonds in any case." That's because the value of your stocks would have risen, and the value of your bonds would have fallen.

Natural market timing

As you can see, sticking with your asset allocation naturally makes you a market timer, as you rebalance your portfolio when markets move far enough in one direction to push your weightings out of whack. Rebalancing forces investors to sell assets that have appreciated and buy those that are undervalued, following the buy-low, sell-high strategy.

Another way to engage in market timing is to invest in asset allocation mutual funds. Fund managers running these funds can switch among markets as they please and thus can employ their own market-timing strategies. In addition, some funds go long and short stocks, employing a hedging strategy. When a fund goes long, it purchases stocks with the expectation they will appreciate. Conversely, when it shorts stocks, the fund attempts to profit from declines in stock prices.

Whatever you choose, "The bottom line is that you don't want to put all your eggs in one basket," says Sheldon.

Another market-timing strategy employs the use of technical analysis -- using market charts and statistics to decide whether to buy or sell. This is Lowry Research's specialty.

Advance/decline lines

While technicians use numerous techniques to identify market trends, Dickson says one simple indicator investors can use is advance/decline lines -- the number of advancing stocks in a day minus the number of decliners. When the market is rising but that difference stops making new highs, "that's a dangerous sign for the long term," Dickson says.

"In every bull market top since 1929, there have been only three times when there hasn't been that divergence" between the market's direction and the advance/decline line.

Litchfield uses the "Lowry down day" indicator, which portends the end of a bear market -- a sustained period of time during which the stock market declines 20 percent or more and pessimism is all-pervasive. If there is a day that 90 percent of stocks fall, and 90 percent of trading volume occurs when stock prices are falling (a Lowry down day), that's a sign that the bear market may be ending, he says.

Usually the down day will be accompanied by an intraday reversal (upward move) for the market. Litchfield also would want to see the market rise within a few days afterward and then again four to seven days later. He finds the strategy effective about 75 percent of the time.

In general, though, Litchfield thinks it's easier to time market tops than bottoms. Sharp drops often come one after another like a cascading waterfall, he says. "Bottoms are made on the emotions of crowds, while tops are more of a process."


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