Market timing

Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis. This is an investment strategy based on the outlook for an aggregate market, rather than for a particular financial asset. Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis. This is an investment strategy based on the outlook for an aggregate market, rather than for a particular financial asset. Whether market timing is ever a viable investment strategy is controversial. Some may consider market timing to be a form of gambling based on pure chance, because they do not believe in undervalued or overvalued markets. The efficient-market hypothesis claims that financial prices always exhibit random walk behavior and thus cannot be predicted with consistency. Some consider market timing to be sensible in certain situations, such as an apparent bubble. However, because the economy is a complex system that contains many factors, even at times of significant market optimism or pessimism, it remains difficult, if not impossible, to predetermine the local maximum or minimum of future prices with any precision; a so-called bubble can last for many years before prices collapse. Likewise, a crash can persist for extended periods; stocks that appear to be 'cheap' at a glance, can often become much cheaper afterwards, before then either rebounding at some time in the future or heading toward bankruptcy. Proponents of market timing counter that market timing is just another name for trading. They argue that 'attempting to predict future market price movements' is what all traders do, regardless of whether they trade individual stocks or collections of stocks, aka, mutual funds. Thus if market timing is not a viable investment strategy, the proponents say, then neither is any of the trading on the various stock exchanges. Those who disagree with this view usually advocate a buy-and-hold strategy with periodic 're-balancing'. Others contend that predicting the next event that will affect the economy and stock prices is notoriously difficult. For examples, consider the many unforeseeable, unpredictable, uncertain events between 1985 and 2013 that are shown in Figures 1 to 6 of Measuring Economic Policy Uncertainty. Few people in the world correctly predicted the timing and causes of the Great Recession during 2007–2009. The Federal Reserve Bank of Kansas City has published a review of several relatively simple and statistically successful market-timing strategies. It found, for example, that 'Extremely low spreads, as compared to their historical ranges, appear to predict higher frequencies of subsequent market downturns in monthly data' and that 'the strategy based on the spread between the P/E ratio and a short-term interest rate comfortably and robustly beat the market index even when transaction costs are incorporated'. Institutional investors often use proprietary market-timing software developed internally that can be a trade secret. Some algorithms, like the one developed by Nobel Prize–winning economist Robert C. Merton, attempts to predict the future superiority of stocks versus bonds (or vice versa), have been published in peer-reviewed journals and are publicly accessible. Market timing often looks at moving averages such as 50- and 200-day moving averages (which are particularly popular). Some people believe that if the market has gone above the 50- or 200-day average that should be considered bullish, or below conversely bearish. Technical analysts consider it significant when one moving average crosses over another. The market timers then predict that the trend will, more likely than not, continue in the future. Others say, 'nobody knows' and that world economies and stock markets are of such complexity that market-timing strategies are unlikely to be more profitable than buy-and-hold strategies. Moving average strategies are simple to understand, and often claim to give good returns, but the results may be confused by hindsight and data mining.