Reader Question

I have been having an interesting exchange about market timing with a regular reader whom I'll call Mr. Z.

This was Mr. Z's last email to me.

I think that for people who follow the market everyday it makes sense to try to play weekly trends like you said to try to avoid the big down chunks. I remember in Feburary you said that the market fells very flimsy. That was due to the Nasdaq lagging. Then in March I remember you said that the market going down a lot seems like a good probability and if there is a bounce that might be a good time to sell without a positive fundamental change. You also had the correct call the Feburary jobs number could be a blip. The rally a couple weeks ago was on light volume so it was no surprise it was a false rally. So for someone such as yourself who can guage things very well would playing trends that are backed up by opinion be a good idea. If you are correct why not try to profit. Of course patience is very important with this method.

To read his email I must now proclaim I am the greatest prognosticator in all the land!! This is of course a humor attempt. It might be more correct to think I've been in touch with the current state of the market and have strung together a couple of accurate calls. To my way of thinking market timing every 4% or 5% based on a hunch I have or some other type of indicator would, I think, violate my fiduciary obligation. Very very few people can time the type of trades Mr. Z talks about. I can not envision a scenario where my trying to manage someone's life savings this way would be the best possible thing for them. Trying to allocate a small portion to this strategy, as Mr. Z suggested in a previous email, would not work either. This type of trading has to include some trades that go bad. So how much alpha could be added with 1/3 of the portfolio exposed that way? Probably not much.

I also think that a timing strategy, as suggested, would put clients through extra stress. Most folks I deal with want to keep up with the market with as little volatility as possible. This is problematic enough without the possibility of ramping up the trading.

Also from the standpoint of knowing your limitations I would have a much harder time remaining emotionally detached if I rolled everything into SPY the day before a 2% drop. This would create a greater possibility of getting whipsawed.

To close I don't think it is a given that getting more big picture things right than wrong (a big focus of my work) necessarily equates to success with shorter term trading.