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Can You Time the Market?

Submitted by thetechnicaltake on 08/12/2011 12:17 -0400

A lot of investors state that it is impossible to time the market. I would totally disagree, and in fact, I would counter that if you don’t think you can time the market, then you shouldn’t be making investing decisions for yourself or on behalf of others.

Whether you use fundamentals or technicals or some other form of analysis, every market participant wants to buy low and sell high. What is the point then of all this noise that we are constantly bombarded with on the TV and in the blogosphere? Why would you even care about GDP, unemployment, sovereign debt, yields spreads, growth, retail sales, overbought, oversold, Hindenburg omen, etc if you weren’t trying to gain an edge to buy low and sell high?

Most investors, who state that you cannot time the market, tend to rely upon fundamental analysis. They will disparage market timing and other forms of analysis, like technical analysis — as in, “that stuff doesn’t work” — to bolster the argument that their form of analysis is superior. Rather than build the bullish or bearish case with their tools, let’s shoot down what the other guys are doing. But the fundamental tools are no better or worst than the technical tools, and this can be seen in the statements made by most analysts who use fundamental analysis to navigate the markets. They are so uncertain. We get analysts who will say, “I am buyer at these levels, but I am just dipping a toe in the water”. Or “the market is oversold, but I am not going in with both feet just yet.” There isn’t a lot of conviction — is there?

Why the lack of conviction amongst the analysts and pundits? Honestly, I think it stems from a lack of doing their homework. I am not saying they don’t do homework; I am saying they don’t do enough homework. Hey, you can recommend to do anything in the market at anytime, and if you have the ability to withstand significant loss of capital and wait an awfully long time, then you will eventually be right. Dow 36,000 sounds plausible but maybe not in my lifetime. And Dow 36000 is a perfect example. Since that “call” was made, the Dow has lost over 50% of its value although it has recovered nicely, and that 36000 number seems a long way off. We are right on track for Dow 36000!!

But the lack of conviction also stems from a great deal uncertainty in the market. You just never know. Therefore, I can clearly understand a measured approach to investing. But remove some of the uncertainty by creating an expectation for how a trade or investment should go. Ask yourself at what point you are going to throw in the towel and cut your losses if the trade should move against you. In essence, plan a trade and trade a plan. Rarely do you see folks state their expectations for a trade or investment. They may state price targets but rarely do you see them state how long it will take to achieve that price target and how much of a loss you might have to endure before prices start moving towards that price target. These are very important factors when gauging an investment.

In any case, the recommendation to buy or sell shouldn’t stop with “I am testing the waters and if I screw up, I have some fire power left over.” That works great some of the time, and there are those times when it doesn’t. Oops! 2008 comes to mind. Oh, but this isn’t 2008. That well may be, but are you 100% sure? But it really doesn’t matter if it is 2008 or not. As long as you have a plan and the conviction to execute that plan, then you should be able navigate a fairly hostile environment known as the market. If you don’t understand this, then you are likely to be burned.

So the next time you see an analyst “testing the waters” just ask yourself: “why aren’t they going all in?” It is likely they don’t have a plan.

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