Market timing: know when to fold ’em

Our ‘buy-low-sell-high’ approach to getting higher-than-average long-term returns has nothing to do with being brilliant when the stock market goes UP. It’s all about not losing when the market goes DOWN. Buy low, sell high. Buy high, sell higher. Both involve selling. Behavioural finance analyst Ken Norquay uses his reversal model to pick the time to sell.

Market_TimingThose who think investing is all about getting rich are gambling. Those who imagine there are no hard times are fantasizing. Remembering is the cure for both of these harmful beliefs.

The US stock market has risen 24.5 per cent in the year since the American election. It has gone up 289 per cent in the 8+ years since the March 2009 low. In the world of economic cycles, the long-term bull market is in its late autumn, not its early spring.

Those who remember seasonal trends in the economy have statistical support for an entertaining stock market riddle: If a ‘Buy-and-Hold’ investor buys the US stock market on the same day every year, what is the best day to make this annual purchase? Answer: November 1.

At this time, we don’t have a similar date for the Canadian market.

Market timing as an investment strategy

Years ago, I attended a conference on market timing, where I met a witty futures trader who had done a statistical study. He told us that he had the simplest timing indicator ever for ‘Buy-and-Hold’ investors. “Buy on the first trading day after Hallowe’en,” he said. Then he showed us the statistics to prove it.

In the world of investing, it was a valid statistical lesson. His simple investment strategy made a big difference to those who could follow it. But, in a world where commissions and management fees override market timing, his timing strategy seemed funny. We all laughed. Since then, his timing indicator has drifted into obscurity. I checked. Even Google doesn’t remember his statistical study.

Other seasonal studies show that, over the long haul, the market’s strongest season has been winter: November to May. The weakest has been summer: May to November. Most investment advisors forget about this long-term indicator and recommend buying whenever their customer has the money. Forget about timing.

Some may remember the US presidential-election-cycle theory, which holds that the weakest years for the stock market are the first and second year of the new president’s term. The strongest years are the last two. But not this time! For President Donald Trump, year one was a powerhouse. It is important to appreciate the reality of financial statistics: in the stock market, no theory works 100 per cent of the time.

When to own stocks—and when not

In my investing book, Beyond the Bull, I encourage people to create investment plans based on remembering stock market statistics and following market trends. Then, we refine our plan as we remember that no stock market theory is 100 per cent correct. Basically, we want to own stocks when the stock market is rising, and not own them when the market is falling.

An over-simplified example of such a plan would be The Reversal Model. It calls for being 100 per cent IN the market or 100 per cent OUT. We sell out when the S&P500 index reverses 7.2 per cent from its high and buy when it reverses 8.4 per cent from its low. In this way, we will be IN the market for every major move up, and OUT of the market during every major move down. Of course, there will be many entries and exits where we make or lose a small percentage.

This formula has been back-tested with over a century of data and improved ‘buy-and-hold’ performance by about 150 per cent. (For example, if the ‘buy-and-hold’ return was 9 per cent per year for the past 100 years, the reversal model got about 13.5 per cent for that same time, assuming normal transaction fees and no management expense ratio.)  If you use stock market ETFs as the equity portion of your overall investment portfolio, the reversal model is a reasonable way to manage it.

But in times like now, when the market has gone up for such a long time, we often forget about the tough times. We forget about the bear markets of 2008 or 2001, when the stock markets dropped almost by half.

November winds help us remember.

Now, let’s review the financial trends that most affect conservative Canadian investors.

In the long term . . .

The US stock market registered another new high in November: the long-term uptrend is still intact.

The laggard Canadian stock market also touched a new high in November, surpassing its September 2014 high by 3 per cent and its June 2008 high by 6.9 per cent. A 3 per cent return in 3 years and 7 per cent return over 9 years are evidence that the long-term trend for the TSX Composite Index is neutral. (Later in this report, we will remember the strongest and weakest industrial sectors within the composite.)

Long-term US and Canadian interest rates (as measured by the yield of government bonds of 20 year+ maturities) have been in an uptrend since July 2016. Central banks in both countries have confirmed this down-to-up trend reversal by increasing short-term interest rates.

The US dollar, as measured against ‘the basket’ of non-US currencies, has been in a long-term uptrend since the financial crisis of 2008.

The Canadian dollar, as measured against the US dollar, has been in an uptrend since the climactic low in oil prices in February 2016.

The price of gold has been in a long-term uptrend since the low of December 2015, albeit a weak uptrend.

The price of oil has been in a long-term up trend since the low in February 2016.

It is noteworthy to observe that oil and gold prices were in downtrends only a few years ago; those downtrends ended almost two years ago, in winter 2015-2016. During the decline, the natural resource stocks associated with these two important commodities collapsed, causing a huge drag on the TSX Composite Index. This is the main reason that the Canadian stock market has underperformed US stocks for the last few years. It also accounts for the weakness of the loonie vs. the US dollar.

As for Canada . . .

Let’s remember some of the success stories of the TSX Composite Index, the strong stocks that kept diversified mutual funds from collapsing when gold and oil collapsed.

Industrial Sector: up 412 per cent since the 2009 low.

Consumer Discretionary: up 359 per cent since the 2009 low. (I am continually fascinated by stock market performance in the face of economic trauma. Target and Sears have gone bankrupt in Canada, while other consumer discretionary companies keep succeeding. Fascinating!)

Real Estate: up 341 per cent since the 2009 low. Note: This sector peaked in July 2016 and has not made a new high since.

Financials: up 337 per cent since the 2009 low.

Information Technology: up 312 per cent since the 2009 low.

Telecom: up 254 per cent since the 2009 low.

Utilities: up 170 per cent since the 2009 low.

The weakest sectors have been Energy, Materials, Gold Mining and Health Care.

Because oil and gold prices and many of the related resource stocks are in up trends following huge sell-offs, I have been recommending them for traders. The strategy is to buy after a large downtrend when risk is lowest. The strong-performing industries listed above are more risky because the up trends are so old. We recommend ‘buy-low-sell-high’, hence gold and oil stocks. But other trend-following strategists recommend ‘buy-high-sell-higher’. These strategists would recommend the stock market sub-indices listed above. Both are valid strategies, but require different rules for when to buy and when to sell.

My advice? Any strategy includes selling

Our ‘buy-low-sell-high’ approach to getting higher-than-average long-term returns has nothing to do with being brilliant when the stock market goes UP. It’s all about not losing when the market goes DOWN. Buy low, sell high. Buy high, sell higher. Both involve selling high. Selling. Don’t forget.

In my stock market book, Beyond the Bull, I describe a world where the price of everything is connected to the price of everything else. These financial trends affect all investors. But, realistically, these trends are not totally predictable. No stock market statistic works 100 per cent of the time. And that, in turn, is why we all need an investment strategy that protects us from loss when market prices turn down.

Based on the reversal model, the time to sell stocks will come when the S&P500 drops below 2410.

Ken Norquay, CMT, is the author of the book Beyond the Bull, which discusses the impact of your personality on your long-term investments: behavioural finance. He can be reached at

This is an edited version of an article that was originally published for subscribers in the November 2017/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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