I’ve already written about market timing and why I think that market timing doesn’t work. However, I have done some additional research recently after a meeting with a stock broker. No, he wasn’t a wizard or a medium, but still, it feels like he was able to predict the future. He was showing me a trading technique that enables him to use market timing in order to avoid most of the stock market downfalls along with getting on the boat early in case of market up trends. Do you believe that? Here’s how it works;
Market Timing Technique; Trading with the Moving Average
You might have heard of trading with the moving average (click on the link to get the full explanation). The idea is quite simple; you cross reference your ETF or stock with its 200 day moving average on a graph. Each time the 2 lines cross each other, you make a trade. It seems quite simple, but it works…. Well, so says the broker anyway ;-).
I’ve done some research and found that this method has been popularized by Mebane Faber and his Ivy Portfolio. He has developed an entire trading theory based on this simple technical trading system… not bad, huh?
I’ve Tried Market Timing and it Works!
I must admit that I was very intrigued by this new way of approaching market timing. This is why I have pursued my research and I have built my own ETF portfolio and went back to look at each of them for a 10 year period. I’ve done the trading calculations according to Faber’s technical trading strategy. The resume of my search can be found in my conclusion on ETF Asset Allocation Model with Trading Moving Average over at another blog; Experiments in Finance.
The most shocking conclusion was the following; as simple as it seems, as easy to apply as it is, trading with the moving average works!
A Tool to Use it with Your Portfolio
After looking at this trading technique, I thought; how can I easily apply this trading strategy to my portfolio without having to look at the technical data every day?
This is when I have found Market Club Email Alert System. The way it works is fairly easy; you add as many stocks or indexes as you want. Each time that you should make a trade according to technical analysis, you receive an email telling you if you should buy or sell your position.
Using their triangle strategy (based on the fundamentals of technical analysis), you will be getting email alerts to tell you when to buy and sell your stocks. This is not exactly like the Ivy Portfolio technique but it is pretty similar. The good news is that you don’t have to follow your stocks and their moving average on a daily basis.
In addition to the email alert service, you also have access to premium charts, portfolio analysis as well as online seminars on several investing topics. Click here to try it for free for 2 weeks if you want to look at how it works.
Pros and Cons of Market Timing
I am not 100% about the whole trading strategy. While it seems to work well, I still have my doubts. The problem is not in the strategy but more with the investor. The problem with market timing is that you cannot really ignore the market if you are long. This means that you need to be able to trade everyday of the year… including vacations.
When I did my trading tables (Available on Experiments in Finance), I have noticed that sometimes, if you wait between 1 day and a week to make a trade, you could put the whole strategy at risk. Downfalls can happen pretty fast.
The other problem I see is with the emotions of the investor. Sometimes, our beliefs will be stronger than simply following the statistics. This is when guessing can be dangerous.
I’m curious, have you tried any form of technical trading or market timing in your portfolio? Did you succeed?
I’m not a financial expert but I do know some statistics, which can provide a reason why this doesn’t work, having to do with the specificity of the signal. In lay terms, there are times when it crosses the 200-day SMA and you shouldn’t actually buy/sell. It’s easy to look back on the chart and pick out buy and sell points, but who can do this looking forward?
Looking at the graph of SPY on your link, the author says one should have sold in Summer 2008. But the price had already dropped below the 200-day SMA earlier, in Spring 2008. Why not have sold then already?
The “buy signal” is in Fall 2010. But almost right after that, the price again drops below the 200-day SMA. Should I immediately? Or not? At the time, it’s impossible to know whether the price change is a “trend” or or not.
Another reason is more simple: When many people know about a strategy it stops working.
If this method is so full-proof and always works, why is your advisor STILL advising?
I don’t know him, so maybe he prefers helping others make money rather than making it himself, but if it were me, and I had a full-proof way to always beat the market, I’d be sitting on a tropical beach, in my mansion, surrounded by beautiful women. Something to think about.
@The Dividend Pig,
I guess that the author of the Ivy Portfolio (Mebane Faber) is pretty rich by now… he is a successful portfolio manager 😉
Then again, numbers tell me to believe him but I still have a problem with this technique… inside feeling maybe!
I think asset allocation is the single most important factor in determining a portfolios return. Active trading works, but it doesn’t seem to be any more effective than simple asset allocation.
Hi Mike,
There is no doubt that using charts to buy low has created some fantastic returns for me last year, with Moving Averages etc. The only downside is when I sold, of course I made a profit, but I would have been better off buying and holding 🙂
nice post. yeah now pundits are talking of market timing along with fundamental analysis. I did some analysis in my recent posts as well.