Who Says Stock Market Can’t Be Timed

Many individuals and experts state that market timing is impossible. If one has the right approach, then timing the markets can no longer be deemed to be an impossible venture.We all know there are seasons in a year and we know roughly when winter, summer, fall, and spring will begin. No one can predict the exact time the one season will transition into the next. The same rationale applies to market timing. If you are trying to predict the exact market turning points, then you might get it right once or twice, but overall your record will be dismal, it is an exercise in futility for the most part and best reserved for those who seem to have a deep desire to take on large losses. 

Everyone, in general, knows when winter, fall, spring or summer will roughly begin. However, no one can predict the exact date summer will transition into fall. The same line of attack can be applied to timing the markets. Instead of trying to identify the precise Market top or bottom, we look for signs of bottoming and topping action in the market, which would correlate to spotting changes in the weather. This data in turn facilitates the process of determining how close one season is from transitioning to the next. Adopting this approach makes market timing a distinct and achievable feat.

Perhaps the first thing for humans to learn would be simple money management skills. After all, you cannot run without learning to crawl and walk.

Researchers have demonstrated that humans are no better than monkey’s when it comes to managing money  (Kahneman, Santos et al.).  

Kahneman asserts in his book, Thinking Fast & Slow that monkeys with dart board are actually better than humans trying to manage money on wall street.

Some interesting quotes from his book.

“People who spend their time, and earn their living, studying a particular topic produce poorer predictions than dart-throwing monkeys who would have distributed their choices evenly over the options.”

“The idea that the future is unpredictable is undermined every day by the ease with which the past is explained…Our tendency to construct and believe coherent narratives of the past makes it difficult for us to accept the limits of our forecasting ability. Everything makes sense in hindsight; a fact financial pundits exploit every evening as they offer convincing accounts of the day’s events. And we cannot suppress the powerful intuition that what makes sense in hindsight today was predictable yesterday. The illusion that we understand the past fosters overconfidence in our ability to predict the future.”

In general, we tend to agree with what he has to say, and it's, for this reason, we hardly listen to the talking heads. When one understands that the markets are nothing but a cesspool of emotions, the importance of understanding the mass mindset takes on a new meaning. The most important tool in our opinion is mass psychology as it can help one pinpoint the emotional state of the masses. The focus should be on identifying what the masses are doing or going to do, and only then should the technical structure of the markets be examined. It is the masses that drive the markets and not the markets that drive the masses. Understanding what the masses are doing is, therefore, imperative if one hopes to succeed in the markets. History clearly indicates that the masses are always on the wrong side of the equation as they either get in too late or overstay their welcome.

So why do so many individuals fail when it comes to timing the stock market?

The reason most individuals fail is because they take a backward approach to the problem. They treat the stock market as a separate entity. They try to find out what the market is doing, and then they attempt to determine how the crowd will react. When in fact, what they should be doing is looking at the crowd and then using this information to decide how the stock market will react. A market soars to new highs or crashes to new lows because of the way the masses are interpreting the situation. How can you predict something if you are not looking at the source? Human beings are the most illogical of all animals. Despite having the power of reason and logic, they are the only creatures on this planet that will go out of their way to make sure they are in harm’s way. 

Technical analysis is useful in spotting the symptoms of the disease, but it does not identify the cause. To identify the cause, one needs to deal with the main driving force behind the market; emotions are the main driving forces in the market.

If we had to choose between TA and Mass psychology, we would choose mass psychology. There is no standalone tool more powerful than understanding Mass behavioral patterns, at least as far as we are concerned.  But we do not have to choose as we have the option of combining the best elements of TA with Mass Psychology.

Understanding the Modus Operandi of the masses is key to being a successful trader, and we feel that it is probably the most important piece of knowledge when it comes to investing and trading.

To answer the question we put forward at the beginning; yes we believe that market timing does work when conducted in the proper manner;  trying to time the exact bottom or top should be out of the equation.

Utilizing the most basic tenets of mass psychology, one could have easily sidestepped the dot.com bubble, the housing bubble, etc. At the same time one could have jumped into the markets when everyone was panicking, examples are the crash of 1987, 2003, 2007, etc., on each of these occasions, the sentiment was either euphoric or extremely bearish. When sentiment moves to the extreme zones, then opportunity is usually close at hand.  Would you have got out right at the top or opened positions at the precise bottom? The answer is a resounding no. However, you would have walked away with solid profits and would have had the opportunity to purchase quality stocks at rock bottom prices.  Be wary when the crowd is ecstatic and ecstatic when the crowd panics.