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May, 2015


Depends on the definition of "work," of course, but overall the answer is "No," if by that one means that an investor using market timing strategies would regularly come out ahead of the buy-and-hold purchaser of stocks or mutual funds, a person who simply invests as soon as he or she has sufficient funds and leaves the shares invested for the long haul.

There are a few strategies that, at least for brief periods, have led investors to clear more profits for their short-term trades, yet these excess profits are generally slight and are sacrificed as soon as the higher taxes for short-term trading have been paid.

For example, a popular equity trading approach is to "Sell in May and go away," redeeming shares at the first market open in May (that is, just after 4/30) and buying back shares at the opening of the market on the first trading day following Halloween (just after October 31). Thus the sell in May investor remains out of the market for about 6 months a year. Historically, the period from May through October has been the half of the year that performs least well. Yet once low money market rates, short-term taxes, and anomalous years for the market are taken into account, one would do better to be a buy-and-hold stocks market investor.

If one defines timing success as merely above market level risk-adjusted returns, there is a weak case to be made for some of these methods. By being out of volatile stock markets more of the time, the timing strategist reduces the hazard of needing to sell with a loss of principal. On the other hand, over the long-term stocks do so much better than cash equivalents or bonds that investors who cautiously keep significant funds out of the market much of the time wind up with less to show for their efforts and hard-earned funds once inflation (which in the U.S. has averaged about 3% a year) is taken into account. Thus the real (after inflation) average returns for the S&P 500 Index have been about 7% a year, while those for both money market funds and bonds have been far lower or negative. It is as though, by seeking greater safety, the too cautious saver actually is giving money away.

Old style trading on the NYSE - 1963 (Wikipedia)

There are naturally times when it makes perfect sense to be out of most stocks or stock mutual funds. If one is elderly or has short-term goals for one's liquid assets, for instance to pay for teenagers' college educations, so that there would likely not be time for the market to lift one's holdings back into the black after a severe correction, heavy exposure to the stock market may not be a good idea.

If, notwithstanding the above analyses, one chooses to follow a short-term market timing approach with one's shares or funds, the present circumstances offer special challenges for deciding when to get out of the market. On the one hand, bull markets definitely do not last forever, and the present one is generally thought to have begun in early March, 2009, and so is already over 6 years old, whereas typically they change to bear markets in around 4 years. One cannot tell from that norm, though, just how long or short a particular bull market will last. This one might continue another 5 years or could become a bear later this month. Nobody knows.

In addition, the value one gets for average share prices today is lower than in several years. It can therefore be observed that, everything else being equal, the odds seem now to be increasing of a big correction or a bear market sooner rather than later and that the payoff of continuing to hold shares rather than selling is now lower than usual.

On the other hand, while there are no guarantees and each market is different, there is one timing technique that may offer good prospects for this bull market lasting at least through most of 2015. Some investors like to look at the current year of the U.S. presidential term. It turns out that the third year (which President Obama is now in) of each 4-year long presidential term provides the best average equity profits, with the S&P 500 Index gaining about 21% in a third presidential term year, on average.

What is more, since the year 1935, S&P 500 Index returns for years ending in 5 (such as 2015) have always been positive, averaging better than 25%. Why is this the case? I have no idea. Like the third presidential term years since 1935, the number of years ending in 5 that have occurred since the inception of the S&P 500 Index is limited, and one ought not draw too much statistical inference from this small a sample. Nonetheless, the combined equity profit potential of third presidential term years and of years ending in 5 evidently supports 2015 shaping up to be a fairly good stock market year.

Don't count on it, however, if soon we enter a period of severe uncertainty. Market investors hate uncertainty worse than they love either the third years of their presidents' terms or the number 5. If ISIS strikes major terror on the home front, all bets are off.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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