Market Timing vs. Buy & Hold...


I've previously mentioned that I experimented with market timing to determine when to buy/sell stocks. See my posts on the topic - here, here, here and here.

That theory, and those indicators, was based on some simple backtesting I did with a few large indices, such as the S&P500 and FTSE, for which I was able to easily plot and get data for using Google Finance. Sadly, Google seem to have removed all their lovely charts and data, presumably under pressure from financial companies who earn money for providing data that Google was providing for free.

In any case, the backtesting I did at that time was manual - i.e. I would follow the graph and make a note of the trades once the indicators were hit.

I wanted to automate this process to make it easier to test different timings, so I made an epic spreadsheet (and learned some new Excel skills along the way):


Here's an extract of an exponential moving average and SSTO (slow stochastic) to indicate when to buy and when to sell the Dow Jones (DJI).

The reason I was so interested was that this method avoids the large market drawdowns seen in the recent 2000 and 2007 crashes. You can see in the screenshot that this strategy gets out of the market near the top and gets back in near the bottom. It also beats a buy and hold strategy, generating a 9.9% annual return vs. 9.4% for buy and hold.

BUT

Sadly, I also found that the timings are specific for every market. When I applied the timings that worked on the DJI, they didn't work on the S&P (another large US index) or the MSCI World.

Each market had its own very specific timings that were needed to beat simply buying the market and holding it through all the ups and downs.

I had hoped that because:

  • markets ultimately reflect human sentiment and
  • the majority of the market is made up of large players who need to move their money more slowly than us small fish
I would be able to find a decent long-term indicator (e.g. the 144 week exponential moving average) that would allow those of us with small holdings who can sell in an instant avoid the long bear market period and buy back in near the low.

Sadly, this proved not to be the case.

I should have known better - like these guys.

They found that, out of more than a million market-timing strategies, 0.2% beat buy and hold.

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