Tue 6 Mar 2007
More than any other factor, it is the primary, or underlying, direction of the stock market that will determine the success or failure of a trading position. A stock can have a fabulous story, great fundamentals, a good technical position, strong sponsorship and yet turn into a bad trade if you are going long and the market is headed down. The same is true of an undistinguished stock that just goes up because it is being carried along in a strong up market. Stock Market Timing is a Stock Market direction system that forecasts the future short term direction of the market.
Isn’t it a smart play to cash in your stocks and ride out a down market? You can preserve your capital and jump back in when stocks begin moving up again. As logical as that strategy sounds, it is fraught with peril for most investors. There are several problems with “playing it safe” by cashing out and you may, in fact, create additional risks in doing so.
The first problem is knowing for sure that the market is turning bearish and not just in a temporary bad mood. A prolonged downturn doesn’t announce itself with great clarity. If you are wrong and the market shakes the blues and rebounds, you’ll be stuck on the sidelines buying back in to rising prices. You sold because prices were dropping and now you’re buying back in to rising prices.
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If you are wrong, you’ll be stuck on the sidelines buying back in to rising prices. You sold because prices were dropping and now you’re buying back in to rising prices. This is not a formula for success.
The second problem is, even if you are correct that the market is serious about the downturn, timing the rebound can be tricky. There will be many false starts before the market begins its recovery in earnest. History shows most of the gains coming out of a down market happen in the first 12 months. What if you miss six of those 12 months?
What’s your time horizon? If you are a number of years away from needing the money out of your stock investments, your best bet may be to ride out the storm.
If you are nearing a time, you will need the money and are afraid that you may have to sell in a down market; your choices are more limited. Defensive stocks are worth considering. This is one of the reasons it is important to begin shifting assets out of stocks and into fixed income securities as your time frame shortens.
In most cases, you are better off staying in the market than trying to time when it will turn down and come back up.
