Market Timing: Pay Attention

Pay attention, folks.  This is a critical time for watching the stock market and thinking about your investments and exposure to a market drop.

I have long been a fan of financial newsletters, market timing, and following the market in real time.  I believe that asset classes rotate in relative value over time, and that there are real gains to paying attention to these cycles and buying / selling asset classes that are undervalued or overvalued.

I have read and reviewed hundreds of different writers on the financial markets.  Unfortunately, the vast majority tend to fall into one of the following categories:

  1. Broken clocks.  Broken clocks tend to be always bullish (stock market cheerleaders) or always bearish (doomdayers).  They usually don’t change their tune or try to identify relative times when they are more bullish or more bearish.  They simply parrot their fixed view to buy or sell, cheering their successful predictions here and there — yet even a broken clock is right twice a day.
  2. Efficient markets.  Efficient market folks think market timing is a waste of time (think: Jeremy Siegel, Stocks for the Long Run; Burton Malkiel, A Random Walk Down Wall Street).  Why pay attention to relative value if you think future market movements can’t be predicted with any degree of success?  If the market immediately absorbs any profit opportunities, don’t waste your time trying to predict it.  While a valid view, I suppose, it doesn’t provide much help for folks like me who see significant evidence of asset classes deviating from fundamental value over time.
  3. Popular media.  Popular media writers tend to be relatively surface level and underinformed about theories of undervaluation and overvaluation — not all, but many of them.  Once people develop a keen understanding of markets, they’re more often investing and trading rather than writing.  It’s hard to find insightful and successful folks who spend their time sharing insights with the world.
  4. No framework.  The vast majority of market coverage has no framework in mind for what assets are expensive versus cheap.  Without a framework, or a way of thinking about how and why the market changes value, how can you advise when to buy or sell?

So, I’ve read and reviewed and sorted out down to my three favorite market timers after many years of reading financial newsletters.  The folks below don’t fall into any of the above categories.  They truly are at the top of the pyramid in terms of insight, accuracy, transparency, and providing good information publicly.  They are, in no particular order:

  1. David Skarica @  Dave Skarica is a master trader and market timer.  He has superior analysis and knowledge of historical trading patterns, and has a keen framework combining market psychology, fundamentals, and technical analysis.  His latest book (he has a few), Bear Market Rising, was published earlier this year.  He provides articles, videos, podcasts, and has a paid premium service for his members.  He is one of the best market timers I have ever seen.
  2. Mike Swanson @  Mike Swanson is a practical, straightforward trader who identifies, trades, and profits off of basic bull/bear market cycles.  His book, Strategic Stock Trading, provides a simple yet cohesive way of understanding and getting ahead of market psychology.  I highly recommend it — it will be the best $15 you spend this year.  He also provides public analysis and has a paid premium trading service that is very popular.  His approach revolves around the following basic idea of stock market investing, which is explained visually in the following graphic (hint: you want to be investing in late Stage 1 / early Stage 2 and selling in Stage 3):Swanson Psychology
  3. John Hussman @  Dr. John Hussman is an economist, mutual fund manager, and one of the most intelligent and data-driven market analysts in the business.  His approach revolves around (1) picking stocks to outperform and (2) hedging market exposure based on market timing.  His weekly market comment is the best on the web and worth reading each week.  While his fund performance over the past few years has been less than stellar, time will tell whether his approach / methods are vindicated (by a significant market loss).

Importantly, all three of these market timers have been ringing the bells about the overvalued stock market for several years now.  They’ve all been waiting for a decline that is always just a bit out of reach and delayed by low rates and quantitative easing.  I’ve been similarly pessimistic about stock market valuations since 2013/2014, and have also been waiting for the market to turn.  Recently, some more notable alarm bells are sounding from all three:

  1. David Skarica, Video: Canary in the Coal Mine (Sept 26, 2016): “If we go look at how the markets have topped over the last year-and-a-half since the August 2015 top, it’s very similar when the market’s topping.  What happens is the momentum kind of stalls out, and then you get this [] up and down movement…  When I look at charts of the Dow stocks, they look really bad to me…
  2. Mike Swanson, The Stock Market is Headed for an October Drop (Sept 27, 2016): “Now I believe that the stock market is now lined up for an October drop…  It seems to me that we are going to break that 2120 level within the next ten trading sessions (it could happen this week even) and then go down again.  In my view people should raise up CASH RESERVES if they have done so already so that they will have the ability to buy at a cheaper level instead of becoming one of the millions of forced sellers.
  3. John Hussman, Structural Growth and Dope-Dealers on Speed Dial (Sept 26, 2016): “I remain convinced that whatever incremental returns investors expect from the U.S. stock market in the next few years should be tempered by an estimate of potential losses in the 40-55% range. That outcome would actually be fairly run-of-the-mill over the completion of the present market cycle, from the standpoint of current valuation extremes. Whatever your estimate of potential return, temper it with a historically-informed assessment of the potential risk.”

At the same time, all three of the above writers recognize that markets can (and have) continued to melt higher despite high valuations.  Timing market tops is notoriously difficult, but once the break lower starts, all three are convinced that we’re looking at a significant decline.  I happen to agree (see Stocks on the Precipice).  There’s uncertainty, for sure, but if you’re not prepared for at least the possibility of a severe decline, you need to wake up and pay attention, now more than ever.

— Thriving Dad

Referenced books:

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