Timing the Market

One again I caution that market timing implies that investors should dump their investments when they get a “sell” signal from some seasonal or black box strategy and then buy them back when a “buy” signal is generated. Caveat: No timing model works all the time. No market timing model should ever be used by investors to jump in and out of the stock market. A prudent investor should never sell a good investment based on any timing model but rather to maybe tone down the risk on a sell signal and than take on a little more risk when a buy signal is generated. Risk in the portfolio could be too much sector concentration or too much leverage or too little diversification.

A few posts ago I commented on CIBC`s asset allocation strategy that claims since 1998, every time bond yields fell, stock prices fell, and every time bond yields rise, in general, stock prices also rise in lockstep. CIBC used this analysis to detect and act upon a buy signal for equities in 1998, a sell signal at the beginning of 2000 during “the peak of the tech mania,” a buy signal in October, 2002, and a sell signal again in June, 2007. CIBC also sent out a buy signal in January of 2009.

I assume we are talking about is basic spread or relative analysis between a major stock index like the S&P500 and the price of the 10-year US T-Bond.

Today’s chart is a relative weekly spread between the S&P500 and the 10-yr US T-bond price with the lower plot of a relative spread. The spread displayed is a simple plot1/plot2 spread with a 20 week smoothing line. I bought and sold the S&P500 on the cross. I got the best results when I slowed them both and came up with a 9-yr total batting average of 66% - not bad. Can you guess the two smoothing numbers I used? For more on this model visit me at the World MoneyShow Metro Toronto Convention Centre Friday, October 19, 2:45 pm -3:45 pm EDT