Trying to Time the S&P Could Cost You
Attempting the impossible will not only waste time and effort, but can lead to missed trades.
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One of Wall Street's great ironies is that experts spend a tremendous amount of time, energy, and money trying to time the market, but they aren't very good at it. Famed investor Peter Lynch summed it up quite well: "Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves."
Why is Wall Street so obsessed with trying to predict market turns when there is no track record of consistent success?
The primary reason is that investors want certainty, and market predictions provide the illusion of knowing what the market will do. The fact that so few strategists and pundits get it right is covered up and ignored. When an expert is wrong about the market, the most common response is to keep making the same prediction over and over until the inevitable market cycles finally come into play and there is a shift in market direction.
The biggest problem is that the timing is never precise. The folks that try to predict market tops are almost always early, but they just keep repeating the same arguments, and eventually, the market does turn. They may suffer huge losses from the point of their initial predictions, but that is swept under the rug, and cost basis is totally ignored.
Market predictions are not totally useless. The arguments provide good insights into the factors that are impacting the market the most. The folly is in pretending that you can time how a host of issues will interact and shift the market action within a short time frame.
The obvious inability of market experts to time market turns is mostly ignored by the business media because the folks who make these predictions attract a lot of attention. When a big-name hedge fund manager makes a market call, you can be sure that page views and ratings will spike.
Market timing calls are so common that it creates the impression that they are important and just nonsense. These precautions are always backed by very logical and compelling arguments, but the results aren't any better than a coin flip.
If you can't rely on market experts to predict what the market will do, then what action should you take? How do you prepare yourself for the inevitable corrections and bear markets?
The answer is to follow the price action. Rather than keep trying to guess what is going to happen, be very quick to react to what is actually happening. In other words, be reactionary rather than anticipatory.
The problem with the reactive strategy for many people is that they will suffer losses at a turning point. If you wait for some actual weakness to occur, then you are sure to have some losses on the books.
The appeal of the anticipatory approach is that it creates the hope that you will time the exact turning point with great precision and sell at the exact top. Of course, that doesn't happen. What does happen is that investors miss out on further gains and forego more gains than if they had continued to ride the trend.
Another problem with market timing is that it primarily pertains to the major indexes. Market timers focus almost solely on the S&P 500. While many stocks do move in tandem with that index, we have many notable exceptions. If you make your decision about an individual stock because of the S&P 500, you are very likely to make some major mistakes.
My approach to market timing is to be reactive on a micro level. I want my individual stocks to send me a signal about market conditions. When momentum slows, and they start to break down, then that is the time to react and raise some cash. If I can't find some good charts to buy when this selling occurs, then my cash levels increase, and I'm positioned for a deeper correction or bear market.
That is a lot harder than it sounds, but it has a better chance of success than trying to predict a market top by looking at the S&P 500.
The moral of the story is don't give too much weight to market predictions if there isn't some price action to confirm them. Constantly anticipating disaster will likely cost you far more than any actual disaster.
At the time of publication, DePorre had no position in any security mentioned.
