Within the traditional Value Investing oeuvre it is gospel that an individual cannot time the market, that is predict which direction the stock market is going to move. That is why so much emphasis is placed on valuation of a company rather than if a stock price is going to go up or down in the near term. It shapes much of the value investing psyche. Seth Klarman in his coveted book, but out of print, Margin of Safety, says flatly, you cannot time the market. Because I am naturally a contrarian I don’t believe everything I am told. Even when it is Seth Klarman (Although I wouldn’t bet against him) I prefer evidence.

The first evidence I discovered that some form of Market Timing may work was when I read Jeremy Seigel’s weighty tome, Stocks for the Long Run. He used what is called the 200 day moving average of a stock to determine a buy and sell point for equities, with investment going back and forth from cash to equities.

I have just discovered another paper titled, A Quantitative Approach to Tactical Asset Allocation, by Mebane Farber. The paper’s purpose is to adjust asset allocation in a tactical fashion. It could have easily been retitled Use of Market timing to produce Equity like returns and bond like volatility. Faber suggests that two biggest problems with equities are volatility and drawn downs. This market Timing solution, accoring to Faber reduces both. Faber uses a 10 month moving average. When monthly price is greater than the 10 month moving average one buys the index of market, and if below, sells and moves to cash. This was then compared to a buy and hold, that is continually owning an index of the stock market.

The annualized return between 1900-2008 were 9.21% for buy and hold and 10.45% for the market Timing. 17.87% volatility for buy and hold vs. Market timing and finally the worst year -43.86% for holding equities and -26.87% for market timing.

You should read the study for your self. The problem for me is, that I don’t invest in index funds or the stock market broadly, but in individual stocks. Does this study have any relevance for me? I don’t know, but it is certainly worth looking into. If a relatively simple Technical indicator could actually give me an extra little boost, I would take it.

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