The Market Timing Model is a series of short term sentiment indicators, market value measures and economic indicators that aims to show investors whether it is a good time to buy, hold or sell stocks.
Here is an analogy to explain what Market Timing is and why we follow it, temporarily, during a crisis like this. Imagine you’re a meteorologist and you sit outside every day of the week to do your day job. The vast majority of your time is spent, in a small shed, next to a table with a computer that is connected to all of the networks and systems you need to predict the weather. When it rains, you go inside your shed, when it is sunny, you work outside and bask in the sun.
Every so often, though, a major storm or hurricane comes along. When you get extreme, unruly weather patterns that are abnormal, what do you do? You use your superior knowledge of the weather to close up shop and go inside a proper house. Bunker down. It’s the exact same thing with your finances. During these times of extreme market distress we need to use a bit of fact and science to assess when it’s time to shut the doors and temporarily close down shop.
As we reported on the 19th of January 2020, this period has been one of those times. Now the question is this: when do you open up shop again? When is it safe to go back to normal?
The Market Timing Model still registers a neutral rating today. It has improved since our last update and the first wave of selling ended. But the Covid-19 crisis is continuing to expand and even countries like Italy – which are in lockdown – are experiencing significant rises in case loads. The incredibly ambitious plans that Trump has to open the US by Easter look frustratingly over-optimistic.
Though the case could be made to start drip-feeding into European stocks and shares, with the FTSE All Share down 27.2% after British Prime Minister Boris Johnson caught Covid-19, it’s not time to pop open the bubbly yet. Perhaps you can start to drip feed cash into enticing businesses that are trading at attractive valuations, like Unilever and Diageo.
Timing Model Performance in 2020
Where are we now on 28th March 2020? How is the Market Timing model performing?
As you recall, here is our baseline measure. For US stocks the best measure is the S&P 500 Total Return Index, which shows the total return of the S&P 500 index including dividends and income that is re-invested. The Market Timing Model is then compared against that index as a benchmark below:
The first graph shows you the total return of the S&P 500 index since 1988. We intend to use this as a benchmark that gives investors a wide view of the market and how it has performed since 1988.
The second graph shows the performance 2019-2020 YTD, including the “Sell” call on 20th January 2020. If you sold stocks on that date you can see the Market Timing Model has out-performed the S&P 500 Total Return index by 22.6% YTD. There has been a slight recovery this week and it remains to be seen whether it holds.
The Market Timing Model – Sentiment Indicators
The full Market Timing Model is available as a premium service and we intend to release this to the market shortly.
At the moment the sentiment indicator is sitting at +3 as of 28th March 2020 and suggests a Neutral rating.
There are several things that investors need to watch, and chief amongst them is the coronavirus health crisis and how soon (or long) it takes for us to return to normal. If you expect that the crisis is going to last for another 2-3 months then you should also expect that the market timing model, and the stock market, will continue to march lower until such a time that we see an end to the crisis.
It is also worth watching the price of oil because if it drops below $20 a barrel and starts trading in the $10-$20 range expect that to significantly impact asset prices (like stocks) in the short term.
As we wrote about last week, earnings and unemployment are intrinsically connected to the stock market.
About the Author: David began Frugal Investors in order to help others learn about smarter money management – today. He has spent nine years working as a senior process improvement professional and has extensive experience helping FTSE 100 and Fortune 500 businesses to improve their efficiency, quality and speed of delivery.
Over that same timeframe he has built up a £1mn+ portfolio of stocks and bonds through self-directed investment. Follow David as he uses thorough, detailed investment research aimed towards accruing £2,000,000 in investable assets within the next ten years.