Market timing models | stockbee


Market timing models

One of the reason many people missed out on the market rally so far or got in late is because of lack of market timing model. Many people were very bearish and when the market turned they never believed in the rally. If you use a market timing model you can get in to such explosive moves.

Market Monitor is my market timing model. It uses market breadth for market timing. Market Timing models try to identify periods when it is favorable and unfavorable to invest in the market. The objective is to be aggressive during favorable periods and to be defensive and less invested during unfavorable period. It signaled a buy on 16th March, 5 days after the turn started. That was the signal to be aggressive and that helped catch many explosive moves in last month and half.

Different people use different approach to build market timing models. I have studied various timing systems over the years and they can be broadly classified as:
  1. Monetary indicators: based on interest rates, bond yield, money supply , consumer debt, business debt, savings etc
  2. Economic indicators: gdp growth rate, industrial production, inventory levels, retail sales, durables sales, new home building and so on.
  3. Valuation Indicator: PE ratios, PS ratio , etc.
  4. Sentiment Indicators: investor surveys, fund managers survey, cover pages, VIX, blogger survey
  5. Cyclical Indicator: President cycles, 4 year cycles, best month, best week, best day, X day % change and so on
  6. Technical Indicators: MA cross, chart patterns,
  7. Breadth Indicators: number of stocks up or down %. Worden has wide range of breadth indicators under All Worden Indicators.

There are many Market Timing models in public domain. Some of the useful books to study market timing are:
Being Right or Making Money by Ned Davis can provide you a template for developing a Market Timing system.
Similarly Martin Zweig in his book Martin Zweig Winning on Wall Street has extensive discussion on Market Timing.
Norman Fosback book Stock Market Logic is another good resource for Market Timing ideas.
The Complete Guide to Market Breadth Indicators by Gregory Morris.This book is very detailed book on market breadth.


John said...

Nice post. Agree 100%. A well constructed model is necessary. If we define a timing model as what we use to decide when to trade/invest then it can be argued that everyone has a timing model, although it can be a fairly poor one, like "The Dow has gone down the past 3 days so the market has to go up today". That is a model. One Model you did not mention is the one IBD reports daily in their "The Big Picture" Section. I think the model is somewhat explained in O'Neil's books, but not to the extent that one can generate it's signals independently.

Pradeep Bonde said...

IBD model is based on historic precedent analysis.It uses a certain % move in any of the index as proxy for institutional; buying and goes in to bullish if there are 2 such incidences in 10 days.