Denny wrote: [quote]
Now, before anyone else claims that market timing doesn’t work, I want you to justify it with actual information and/or data showing a timing system that has failed to protect capital during major drawdowns, and had many whipsaws that caused significant underperformance. Otherwise allow those of us that have been using timing successfully over and over help the other members avoid major losses, sleep much better at night, and reap the benefits of investing in the stock market
[/quote]
Denny,
I am on the camp that prefers not to use market timing but you are missing my point. Bear markets happen, major crashes happen, and traders should use tools to protect their capital (and hopefully even to benefit) against such events. Timing, hedging, or combinations of the above are all legitimate techniques and the preference for which to use is a matter of one’s trading philosophy.
I do understand and accept that market timing can protect traders against slow moving bear markets. In fact I have no problem with the use of simple and quite robust systems such Georg’s above (which uses just two parameters) for that purpose.
Misleading on the R2G marketplace:
My compliant is in the context of R2G and the fact that quite few developers have worked out “timing systems” that, with the benefit of a hindsight, are supposed to have skipped in and out of the market dozens of times, capturing every zig and every zag in the back test of the data P123 makes available. In my opinion the chances for such highly curve-fitted timer to survive future market swings are pretty slim, but if people want to buy these signals that is entirely their business and is of course fine by me.
The real issue starts when such designers take their curve-fitted timer, place it over a small cap stock selection - and poof – out comes what appears to be a system with fantastic back-tested returns. That in my opinion is misleading. If someone wants to sell a timer – let him (or her) state so. If someone wants to sell a stock system then let him do so, but don’t let people dress up timers and claim to be selling super stock systems because that is simply not true.
It is misleading to P123 users, misleading to R2G subscribers, and damaging to the rest of the community. P123 should enforce a policy that would help buyers understand the context of what they are buying. It should require developers to separate their systems into stock selection and market timer and make clear what section is responsible to what part of the performance.
Back to the other discussion:
Why do I prefer long-short hedging over market timing?
Timing systems – if they are simple and robust – are legitimate tool for preservation of capital against bear markets. But I for one believe that there is yet another risk, one that timers cannot address. That is the real risk of a major sudden crash. The Flash Crash of 2010 is a great example to what may happen. And that was a “no event” !!! If the “no-event” of 2010 caused a 10% drop in one hour, what would a real event cause? Be it a major act of terror or a default by the US government (which would render trillion of dollars in financial collaterals – useless) or even a default by a smaller government . How about a 50% crash in Futures exchange within the realm of several minutes?
Now think of timing systems. How would even the most stable and robust system provide protection against such plausible event? By the time your timer has compiled the end–of-day signal or the end-of-week (as in R2G) – the damage has already been done.
Hence my philosophy – stay hedged at all times. Because only a hedged Long-short system is inherently stable to sustain market shocks. During a crash the shorts will appreciate while the longs depreciate. And that is the ONLY possible solution to protect capital, IMHO. Real time and always on. With the mounting debt all across the developed world, with geo-political instability brewing in dozens of places at any given time, with massive means of destruction available to growing base of governments and to non-government groups – such shocks are a matter of “when”, not “if”.
Just my opinion,
Zvi
Oh, and one more point:
Market timers protected against slow-moving markets of the past when trends lasted years. What if we moved into a neurotic range-bound era with short term trends? You are always late in and late out with a timer. If the trend is long-term than great but what if the trend turned out to be short-term? Timers would whiplash you in and out the signal. Hedging OTOH keep working smoothly.
We can never know in advance what the characteristic of the market we are at is. Only hindsight tells us what was the period like. But Timers always make certain assumptions about the market and therefore – when proven wrong – it will already have been too late. It even happens to professionals - I happen to know of a market timer hedge fund that got whiplashed in 2011 to the tune of 40% loss…
