OT: Market Timing (Now What?)

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Greetings, Warriors!

There are plenty of things for an investor to worry about if one is inclined to worry. So, does this mean it’s time to bail, to sell and go to all or partial cash? Before we jump in any direction, let’s look and see what some of our fast-growing companies are doing. Where are they really at?

		
**Ticker	Off High	4w G/L**
ABMD	4.0% 	10.7% 
ALGN	6.0% 	4.0% 
GOOGL	9.0% 	(1.4%)
AYX	3.0% 	11.9% 
ANET	9.0% 	15.6% 
BESIY	0.0% 	16.5% 
ABCD	7.0% 	42.6% 
EXAS	23.0% 	9.1% 
FB	13.0% 	(5.4%)
GRUB	2.0% 	12.0% 
HDP	7.0% 	10.9% 
IPGP	5.0% 	4.7% 
JD	14.0% 	(9.0%)
TREE	5.0% 	12.6% 
MA	2.0% 	4.5% 
MU	4.0% 	38.0% 
MKSI	2.0% 	12.4% 
NTES	15.0% 	3.3% 
NVEE	5.0% 	28.7% 
NVDA	2.0% 	2.7% 
PAYC	1.0% 	17.6% 
PYPL	6.0% 	4.3% 
PSTG	11.0% 	(9.1%)
SHOP	4.0% 	11.3% 
SQ	2.0% 	27.2% 
TDC	2.0% 	14.6% 
UBNT	14.0% 	24.5% 
Avg.	6.6% 	11.7%

These aren’t all the stocks followed here, but he list wasn’t cherry-picked and maybe, just maybe, is typical? Anyway, the average drop from the 52week high is 5.6%, and the average gain in the last 4 weeks is 11.7%.—hardly panic territory for long-term investors.

I believe all the smartest people in the room (those that believe in market timing at least) would agree that it is much more important to be quick in buying after a market bottom than it is to sell at a market top. That is because market bottoms are almost always v-shaped and tend to take off quickly, while market tops are almost always rounded in shape and take weeks (usually months) to drop significantly. Black Monday strikes me as the stunning exception. Yes, there are exceptions, but they are rare indeed.

Strategies

Mungofitch’s 99-day rule: Sell when the market hasn’t set a new high for 99 days. This can also be applied to a sector, or an individual stock, although the volatility in the latter could be significantly higher than when applied to the market as a whole, or even to a particular sector.

Many other methods involve applying a Simple Moving Average (SMA) and most of these use a 200-day timeframe. This parameter has been back-tested over and over; the reliability is very high and the timeframe has been found to be the most advantageous again and again.

The goal in most all timing methods, other than for short-term trading, is not to miss out on a 10% drop. It is to miss out on a full-blown recession. It is to miss out on a 40-50% drop, without swinging in and out of the market needlessly at considerable expense.

Is this the Top? (Is it time to sell?)

No one can answer that for us but us. Certainly, I can’t; it’s hard enough to decide for one’s self, let alone for another investor, when it’s time to sit on the sidelines awhile. For me, I’m not concerned at all yet. But that doesn’t mean that I’m not glad to have decided to sell my Facebook and Google and a few other holdings recently. I’m even watching closely to see what my PSTG shares—one of my new holdings—do from here. Maybe I’ll have to drop them and start over with them again when the price changes direction. But not yet.

How many losers do you hold?

For those who have been following this board for any length of time, I’m going to guess 0 or one, unless some of us made several recent changes. I hope I’m right.

Other than the fact that I hope everyone here does well, I don’t care what we do collectively. Does it bother me to see people sell everything when their holdings go down 5-10%? Kind of, maybe. I think it’s a mistake. But I’m aware that I could be wrong, and it’s none of my business. Mostly I’m just glad I didn’t sell out the last time my holdings dropped 5-10%. Or the time before. Or, come to think of it, the time before that ….

The Negatives (or Never Say Never)

• The market is expensive. The P/E ratio of the S&P 500 is 24.69. Historically, a P/E above 17 is a prelude to poor returns. (Disclosure: I don’t own the S&P 500.)
• The Fed isn’t helping. They need to raise interest rates, which is seldom a good sign for stock prices, but the level is still historically low. A wash?

The Bottom Line

What? You want me to fill that in for you?)

Sorry, no can do.

Good luck, all!

Dan

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I’m not too sure how relevant the P/E of the S&P 500 is to the pricing of your list of stocks. I suppose it reflects sentiment which could affect the rest of the market, and so affect the valuation of companies that are growing as much as expected.

Growth could be affected by what happens in the economy as interest rates rise and debt becomes more burdensome, among the numerous factors you listed, which also can make a difference. But a lot of the companies we deal with have no or low debt, and are simply using their high cash flow to fund growth rather than show up as profit.

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"I’m not too sure how relevant the P/E of the S&P 500 is to the pricing of your list of stocks. I suppose it reflects sentiment which could affect the rest of the market … "

Bingo. I expect it will, Ed. Methinks the Herd is collectively crouched and waiting for the secret bat signal to say “Sell!” and if it comes, we will witness a race to the exits. As ever, institutions will have to follow. Longer term it need not affect us at all.

Dan

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I’m not too sure how relevant the P/E of the S&P 500 is to the pricing of your list of stocks.

Remember the tide! As unrelated prices drop people have less wealth, have to sell “something” and it could well be something that looks overvalued. Don’t ever expect the market to work like a billiards table, markets are “complex.” Think in terms of the treads asking what to do about a market top, it involves lots of selling “something” to raise cash.

Stock prices have two attractors, what the underlying company produces and the sum of market expectations. You could think of the market as being “the animal” and think of companies, investors, politicians, regulators, etc, as the cells that make up that animal. All the cells are interrelated to some extent.

Denny Schlesinger

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