Investor interest in market timing usually occurs during the late stages of a bear market as frustrated investors fret over not selling “at the top”. Clearly the market timing movement has gained traction following the great technology bear of 2000-2002 and the recent financial crisis bear of 2007-2009.

Our research suggests that a market timing strategy is not suitable for investors who have at least a three to five year time horizon mainly because bear markets are over-rated in terms of their potential to inflict fatal damage to a well structured portfolio. Bear markets can only inflict serious damage if we are forced to sell at the bottom due to pressure from over leveraging or a personal crisis.

Some bears are narrow and shallow such as in 1984, 1990, 1998 and others – known as Granddaddy Bears are broad and deep as in 1973-1974, 1987 and 2007-2009. The 2000-2002 technology bear was a narrow sector crash.

Consider firstly that only three Granddaddy bears have occurred over the last 40 years and so most investors will only endure about two during their investment years. Secondly timing the smaller bears is a bad idea because if you blow out a portfolio because of some “signal” and you are wrong – you may never get back on board and the investment opportunity is lost for good.

In the long run you’re better off seeking out the Dominant Theme and staying with it for as long as it takes to unfold. The dominant theme is a group of related stocks that emerges from obscurity during a crisis to assume a leadership role for several years. Investors who identify the dominant theme early can buy and hold their way to investment greatness. The last modern Dominant Theme was the “New Economy” technology boom of the 1980’s and 1990’s. In that 20-year period the tech laden NASDAQ advanced non stop over 3000% grinding out an annualized returns of over 20%.

Investors who know if they are investing in a bull or bear market environment can adjust the portfolio accordingly to suit the market conditions. We can identify bulls and bears by using simple trend following strategies.

Some trend following studies are – the primary trend line, long term moving averages and price channels. Our simple S&P/TSX60 model to the right employs price channels.
S&P/TSX60 Index
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The S&P500 Stock Index

Our simple S&P500 Index model to the left employs price channels


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