Market Analysis

Market timing is a mysterious art that many have attempted to master and most have failed. So why do I believe it is possible? Because most “experts” who attempt to master this difficult task go about it the wrong way. They tend to equate market timing with predicting the future. That is not what market timing is all about. Market timing is a discipline that requires patience, attention to detail, and flexibility, but not clairvoyance.

There are a few basic market truths that one has to recognize before attempting to time the market. One is that the big money is slow. Mutual funds, hedge funds, and all other types of large institutional investors control the direction of the market, but they always “tip their hands” because it takes them so long to get in and out of a position. The second truth is that the majority is always wrong. When mutual fund purchases are peaking, that is the time to jump ship. When redemptions are high, it is time to buy.

These are not novel concepts. Investor’s Business Daily founder William O’Neil talks about them in all of his books. Being able to read the signs is just part of the overall equation. The trick is how to take advantage.

The first step is to stop listening to “experts” and to do one’s own analysis. If the majority is always wrong, then that includes the majority of financial magazines, analysts, talking heads on television, etc. Economists are the worst people to listen to. Some of them even admit that they are horrible at market timing. Don’t confuse successful economists with successful investors. Most are one or the other, but not both.

The second step is to use your emotions to your advantage. Typically, the scariest moments in the stock market represent the best opportunities. When you feel happiest about the performance of your investments it is usually time to sell.

Finally, one has to realize that market timing is not about picking the very top or the very bottom of the market. It’s not necessary. The market peaked in October of 2007. You could have sold at Christmas and still missed most of the bear market sitting in cash. The market bottomed in March 2009. You could have bought everything in sight over the Christmas break, 1 year after you sold, and you would be in great shape right now. You don’t have to be exact. You just have to be in the ballpark.

Easy enough, right? Not exactly. Now we must address the greatest obstacle one has to overcome in order to be a successful investor in the years to come. We have to recognize and accept the fact that the United States is not the best place in the world to invest anymore. This is a difficult thing for people to accept for many reasons. One is patriotism. We feel good about investing in our own country. As citizens of the United States we are proud of our country, so why should we send our money overseas when it is needed here? Even if we recognize the need to be global investors, how do we do that? Most financial advisors based in the U.S. concentrate their efforts on analyzing U.S. companies. So we have to find another country and figure out which companies to invest in?

Now comes the easy part. Picking the right country to invest in is easy. Investing in that country’s economy is also very easy. You simply have to make the decision to become a global investor and not be a buy and hold investor. The rest will take care of itself. Here’s why:

1) The growth is in Asia. We know that, we hear that on the news, we’ve seen that for the past 10 years. Any talk of Asia being a bubble like the 1990s internet scenario is inaccurate. Asia’s growth is real and its investment gains are backed by fundamentals. In fact, most companies in Asia are undervalued when you look at their current stock prices. We’ve already narrowed it down to one part of the world to focus our investing.
2) Investing in another part of the world is easier now than it has ever been before. We have ETFs, ADRs, and mutual funds to choose from. I prefer to avoid mutual funds, but ETFs and ADRs are fantastic vehicles worth taking advantage of.
3) It is generally accepted that 50 – 70% of a stock’s movement is related to the overall market environment. If the overall market is going up, there’s a much better chance that your stock is going up.

So I’ve already answered most questions. One could buy an ETF that represents the growing Asian economy and not even worry about trying to be a stock picker. Or one could buy ADRs that represent stock in Asian companies, and concentrate on the fastest growing companies. Either strategy could work.

Obviously, that’s not the only way to invest and there are other areas worth looking into. Israel, Brazil, South Africa, Switzerland and many other countries are worthy of investment consideration. But, for the sake of simplifying investment decision-making, I have used Asia as the example. Hong Kong, China, Taiwan, South Korea, Singapore—take your pick.

One final note on market timing—it is not to be confused with technical analysis. Technical analysis using Fibonacci analytics or chart patterns may be useful for stock trading, but not for overall market timing purposes. What we are focusing on is volume accumulation & distribution, market sentiment, and actual market performance. Technical analysis is useful for choosing individual stocks to buy and determining entry and exit points. The Nicolas Darvas box theory and O’Neil’s IBD technical pattern strategies are very useful when it comes to buying and selling stock in market leading companies. For overall market timing, in my estimation, they are not applicable.