Why Market Timing Is Important

Wait. If this is your first visit make sure you read through my April 2 post first. That posting and this one is vital if you wish to gain maximum benefit from future posts.

Well, as I promised last week below is the historical chart I promised you with all the buy (green) and sell (red) arrows going back to 2000 (click on chart to enlarge). This chart is of the S&P 500 which as you may know is a widely quoted market index which basically measures the overall health of the stock market. In simplest terms if it is going up, the stock market is healthy. If it is going down, it is not. Each black dot that you see is a plot of the closing price of the S&P index on the last day of the month. At the end of each month I look at four different factors; price action, institutional volume, momentum and market breadth. Based on my 20 years of experience I synthesize this information and make a determination as to whether the market is bullish or bearish. If it's bullish that month will be given a green arrow which will remain until a monthly bearish determination is made at which time a red arrow will show.

















Did you know that studies show that at least 70% of stocks rise when the market rises and fall when the market falls? This is why it is so important to have a market timing model you can rely on. How much more money would you have in your 401-k if you had moved all of your 401-k into money market funds on the red arrows and back into mutual funds on the green arrows?

So how might you utilize this information? Well, for me...when there's a green arrow all of my money is in mutual funds. When there is a red arrow I move all my money into a money market fund. Most 401-k plans offer several different mutual funds to the participant, including "index" funds. In my own 401-k I prefer to put all of my money into an S&P index fund when there is a green arrow. The reason is that this fund will mirror the S&P index, which is what I base all my analysis on. If you can't find an "index" fund in your plan I would suggest you consult with your plan advisor/administrator to see what he/she may suggest. Well that's it for this week. As you can see the chart still has a green arrow. I will post another update next Saturday. So stay tuned and please...submit questions.