WHAT IS MARKET TIMING?

  WHAT IS MARKET TIMING?
Market timing can be defined as making investment buy and sell
decisions using a mechanical trading strategy which employs one
or more indicators and/or proven strategies. The objective of a
successful market-timing system is to be invested in the market
during up trends and to be either in cash (or in a short position)
during down trends, especially during brutal bear markets.
Market timing can be applied to all types of investments including
stocks, stock and index options, mutual funds, bonds, and futures.
This book therefore focuses exclusively on using timing with
index funds, sector funds, leveraged funds, and exchange-traded
funds. It is your choice as to which of these investments you prefer
to work with because the timing principles remain the same for
each of them.
Market timing is aimed at taking your emotions out of the
investing equation—or at least minimizing their impact. This
objective is critical to your success. Investor psychology has been
studied for years, and the “herd instinct” is rampant. This urge to
follow the herd plays right into your hands, because the crowd
(whether individual investors or investment advisors) is characteristically
wrong at major stock market tops and bottoms. This situation
will always be with us, because the emotions of dealing with
investing—fear and greed—will never change.
Market timing is not a perfect investing approach; there is no
such thing. Market timing cannot predict when the market will
change direction. But, if you use a reliable market-timing system
and follow its signals, then you will exit the market when it begins  to turn down and you will re-enter the market when it begins to
turn up, all in time to maximize and protect most of your profits. A
study of the performance of professional market timers by
MoniResearch Newsletter, an independent monitoring service, found
that 92 percent of the 25 timers it followed outperformed the market
averages in 1987 when the DJIA dropped by 23 percent on
Black October, and 96 percent did so during the declines in January
1990 and August 1992.
And in the latest time period for the year ending in September,
2002, 88 percent of classic market timers monitored beat the S&P
500 Index. Over the last five years ending on the same date, 63 percent
beat the buy-and-hold strategy. And for those Nasdaq timers
competing against the Nasdaq Composite Index benchmark, the
numbers were even better, with 79 percent beating that index over
five years, and 84 percent over the one-year time frame. These
results are confirmed by Timer Digest publisher, Jim Schmidt, who
found that 65 percent of the 100 market-timing newsletter services
that he tracks beat the S&P 500 benchmark in 2000, 45 percent beat
it in 2001, and 80 percent beat it in 2002. That’s precisely what market
timing is all about—reducing losses when a bear market strikes