OVERVIEW
This web site illustrates how the use of the Stocks-timing stock market timing system can potentially
1) reduce investment risk, and 2) provide better performance in the stock market than the buy-and-hold approach.
If the system is applied on a pro-forma basis to the S&P 500 Index over the
last 22 years it would have resulted in returns that averaged 22% compared to 8% for the S&P 500 Index. (Please see the
historical hypothetical performance of my current system and the DISCLAIMER.) A graph of the
hypothetical performance of
the Stocks-timing system on a pro-forma basis starting with an initial investment of $10,000
from the end of 1986 through 2008 is shown here:
The foregoing graph represents the hypothetical performance, not actual
results. Past hypothetical results are no guarantee of future performance.
I believe that the buy-and-hold philosophy preached by most on Wall Street is in error and was only pushed for
their gains, not those of their clients. If you
believe I'm wrong, this site will not be of interest to you.
I believe that given the right tools, it is possible for people
to manage
their investments
better than most of those who "do it for a living." The under-performance of the buy-and-hold philosophy of many investment managers has
encouraged me to develop a stock market timing system. The long-term goal of the
system is to
keep me from taking a BIG LOSS in the stock market, and at the same time to
perform well in the market.
I am convinced that the buy-and-hold approach is too risky. If, for example, the
stock market goes down 20%, it must come back from
that low point 25% just to break even. If the market goes down 50%, it must come
back a full 100% from that low to break even. During the time the market goes
down, I could have my investments in a money market fund, and perhaps get
back in the market if it starts to rise. This approach
has the potential to put me significantly ahead of the buy-and-hold investor.
Let me use the following example. Let's say my account is in an
S&P 500 mutual fund and at this point in time it's worth $10,000.
Let's also say at this time, each share of the mutual fund is worth $50 (200
shares.) I
then receive a sell signal and transfer my $10,000 out of the S&P
fund and into a money market fund. Then the S&P fund falls in value to
$40 a share which would be a 20% loss. Then I receive a buy signal and
use my $10,000 to buy back into the S&P fund by purchasing 250 shares (at
$40 per share.) Then the fund moves back up to $50 a share which makes my 250 shares worth $12,500. This is a gain of $2500
(25% over my original $10,000,) whereas the buy-and-hold investor has made nothing since
his/her investment is still only worth $10,000.
Another advantage of moving in and out of the stock market is that while a
person is out of the market, the risk of losing money is virtually eliminated; in fact,
interest is being earned on the money while it is in a money market fund.
This web site shows the performance of my latest stock market timing system related to the S&P 500 Index.
I have
constructed a timing system that has performed well on a pro-forma basis compared to this index when looking over the past
22 years.
It must be understood that a timing system can lose money on trades and
that past performance of this system, or any system, does not guarantee
future performance. See DISCLAIMER.
ABOUT THE SYSTEM (BUYING LOW & SELLING
HIGH)
The system uses market internals to produce buy and sell signals for the
S&P 500 Index. Periodically I modify the system to include the benefit of
recent market action. I have shown an illustration of what the current system's performance would have been
using the historical prices of this index. In other words, I applied my
system to historical S&P 500 data and I made certain simplifying
assumptions. It should be understood that using a system
developed for the S&P 500 Index may not continue to be profitable when
applied to that index. See DISCLAIMER.
In addition to the hypothetical performance shown,
my system (without stops) investing in the S&P 500 Index over the period shown in the
table would have experienced a maximum
account drawdown of 27% (stops not included) compared to that of the buy-and-hold
investor's maximum account drawdown of 52%. (See the comment below about
the use of stops.)
The system's higher returns are due primarily to moving the
investment in and out of the index fund at times corresponding to the system's
signals.
The system generated a signal on
average of about 10 times per year over the past 22 years. The number of
signals per year has varied from 2 to 25. (One signal is either a
buy signal or a sell signal.)
I try to formulate it to give a small number of whipsaw
trades over its history.
The system is completely mechanical, so no emotions influence the system’s
signals.
The system is formulated to give next-day signals. After the market closes
each day, the necessary data is gathered. If a signal results, it must then be
acted upon so that the buy or sell trade is made just prior to the close of the
next market day.
In addition to the system signals, I use stop loss levels to further help
limit losses. These stops are not accounted for in the hypothetical performance figures as the figures reflect only the system buy and sell
signals.
The failure of my system to provide timely and accurate signals to purchase
or sell consistently every time in advance of moves in the market may result
in significant future losses.
HOW I USE THE SIGNALS
I take the signals from the system and implement them using index mutual
funds. (There are a number of available fund families from which I can choose.)
As an example, when a buy signal is generated, I might invest in a fund which is an S&P 500 Index fund. When a sell
signal is generated, the money can be transferred into a money market fund where
it will earn interest.
NOTE: Many of the index fund families also have funds that
move inversely to their respective indices if I wanted to "short the
market." Shorting the stock market is more
risky than
just moving the money to a money market fund during a sell signal because of the
greater safety of the money market fund.
It should be noted that when switching investments into and out of stock
market index funds, fees may be charged.
