Market Pulse: Timing model is still bullish
In October we ran an article covering a unique market timing technique that examines the performance of the Nasdaq Composite relative to the S&P 500 index.
Since the market has been exceptionally volatile since then, it’s time to update this timing model to show you how it performed.
Wouldn’t it be nice to be fully invested when the market is rising but sit in cash when it is falling? That’s easier said than done, but market timing does reduce portfolio risk. A portfolio that is temporarily in cash is always less volatile than a portfolio that remains fully invested.
For the vast majority of investors, including myself, market timing also lowers long-term returns. As an example, the most popular timing method uses the 200-day moving average, where you are invested when the S&P 500 is above the moving average and you are in cash when it is below the moving average.
Over long periods this timing method has lowered portfolio returns over a buy-and-hold, but it also reduces volatility.
In my book “Exchange Traded Profits” I introduced a unique timing method that looks at the performance of the Nasdaq Composite relative to the S&P 500. The Nasdaq is like a mood ring for the market. It tracks stocks that tend to be more volatile and aggressive than the blue-chip stocks represented in the S&P 500.
When big money players like the market, they rotate to the Nasdaq stocks because of their better growth potential. When investors are nervous they prefer the safety of the less volatile S&P 500.
My studies show that the most favorable market environments occur when the Nasdaq Composite outperforms the S&P 500. Readers can simply compare the performance of these two measurements to get a sense of the market environment, but I quantified the rule by plugging the relative strength (Nasdaq divided by S&P 500) into a popular formula called the MACD (my book, available at Washoe County libraries, explains this in more detail).
Since 1996, when this indicator favored the Nasdaq the market advanced 295%. When the indicator favored the S&P 500 the market only gained 20%.
This technique moved to a sell signal on Sept. 7, 2018 and switched to a buy on Dec. 28. It has remained bullish this entire year. This system isn’t foolproof, but those last two signals were perfectly timed.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.