Market Pulse: Why you shouldn’t ‘time’ the market
After rising for 10 years the market plunged 34% from mid-February to mid-March and then just as quickly jumped 33%.
Wouldn’t it have been nice to sell before the decline and then buy near the low? Of course, but doing so is easier said than done. There are countless “market timers” who became famous from one good market call only to be toppled from their pedestal. The legends of Wall Street make money by finding good stocks before others do, not timing the market.
I have written about two market timing indicators. The Advance-Decline Line has a good record of calling major market tops, but it didn’t give a sell before the March swoon.
Of course, history will tell if the February high was a major market top. So far the answer is no. Then there is the strength of the Nasdaq versus the S&P 500. This indicator remained on a buy.
Suppose an insightful investor saw what was coming and sold in mid-February. He or she was wise. But were they as insightful in late March when stocks bottomed and began to soar? Did they load up then? Were they right twice? Having to be right twice is the problem.
In the real world emotions come into play and current news and events impact behavior far more than reasoned and insightful analysis.
Of the two required trades, selling is the easy part because at some point the market will almost certainly move below where you sold it.
The bigger problem is getting back in. If stocks keep going down an investor who sold only gets more bearish and more comfortable with his decision.
But after stocks go up he doesn’t want to buy higher than where he sold. That’s human nature. Deciding when to get back in is far more difficult. That’s why people who jump out of the market do not get back in.
Of course there are those who say they are waiting for a “retest” of the low. So they are going to buy at a level at which they didn’t want to buy before? Usually those that say they’ll buy a pullback don’t. They get scared once the pullback occurs.
I was an investment professional during the 1987 crash, the near bear markets of 1990, 1998, 2010, 2018, and the massive bear markets of 2000-02 and 2008-09. Now add 2020.
In each case securities were sold to ridiculous levels that made no sense. If you sell near the top then great, but I’ve learned to never sell into a plunging market that is well off its high. That leads to bad outcomes.
David Vomund is an Incline Village-based Independent Investment Advisor. 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.
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