Call it the market- timing industry’s dirty little secret: bear markets and heightened volatility are good for business.
That’s not because they are ornery by nature. It’s simply a rational recognition on their part that it’s difficult to add value when the stock market is going straight up.
Take the U.S. market’s extraordinary rise over the two years through its January top: It was achieved without even a 5% pullback in the S&P 500 SPX, -0.24% much less the 10% drop that is considered the semi-official definition of a correction. Expected market volatility, as measured by the CBOE’s Volatility Index VIX, +5.51% fell to record lows.
Who needs a market timer during conditions like those? One leading stock-market timer I monitor told me that during the market’s blow-off stage between last November and the late-January peak, he lost 18% of his subscribers. He added that he’d never before experienced a drop in subscribers of similar magnitude — much less over so short a period.
Glenn Neely, editor of the NeoWave market-timing service, said 2016 and 2017 were some of the most difficult he’s experienced in a 30-year career.
Fari Hamzei, editor of the Hamzei Analytics advisory service, put it this way in an email: “At market highs, even your dog is a genius.” But when the market declines and volatility spikes, which sooner or later is inevitable, then the skeptics “all run back to Papa with hat in hand.” He said that he attracted subscribers “in droves” during the market’s March-April volatility.
No wonder market timers secretly hope for a bear market.
This discussion goes to the heart of why our emotions are unreliable guides to investing. We have no interest in market timers just when we need them most, and then — after the market has declined and, in some senses, it’s too late — we suddenly become interested. It’s a classic case of closing the barn door after the horses have left.
A number of investment lessons can be drawn from this insight about how our psychology impacts our market timing, according to Hamzei:
1. “Do not do this [market timing] alone at home.” In most investors’ hands, market timing will be a losing proposition because they will let their emotions overwhelm them.
2. The exception comes only if you have a long history of trading the market and thus have been “battle tested” through several market upheavals. Hamzei stresses that it’s essential to have attended this school of hard knocks: You need to have been trading the market in real time “with your skin in the game, as fear & greed battle you and your account balance in your skull. There is NO school for that & no indicators you can invent or buy on internet. You must have been there and done it. Period.”
3. Otherwise you should rely on an adviser with a proven track record, and “never put all your investment dollars in less than 3 to 5 managers/systems/timing alerts.” Given that Hamzei presumably has a vested interest in receiving all your subscription dollars, this seems like particularly valuable advice.
4. The perfect is the enemy of the good. Jack Schannep, editor of TheDowTheory.com, one of the country’s leading Dow Theorists, agrees: “The genius of investing is recognizing the direction of the trend — not catching the highs or the lows.” The key, Hamzei stresses, is to follow “prudent money management rules” that prevent losses from becoming intolerably large.
Bottom line: Be realistic about what is reasonable to expect when you begin to time the market or subscribe to a market timing service. “No one can consistently get the tops and/or the bottoms right,” Hamzei writes.
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com .