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Timing the Market:
A SYSTEM THAT HAS NEVER FAILED
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by
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Dr. Bart A. DiLiddo
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"Being on the wrong side of the market is the worst thing that can happen to an investor. It doesn't have to happen to you."
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Being on the wrong side of the market is the worst thing that can happen to an investor. It doesn't have to happen to you.
Old Joe Granville always said the market tells its own story. All you have to do is read what it is saying. Unfortunately for him, he didn't take his own advice.
Joe Granville was one of the pioneers of technical analysis. He used several novel methods of "reading the market." The most popular of which is On Balance Volume. Initially, he was quite successful, and became the market "Guru" of the early 1980's. He was so influential that his forecasts became self- fulfilling prophecies. Then he missed the call on the greatest Bull market of all-time. On August 16, 1982 the market broke out of a steep slump, and Joe Granville said it was a folly. He said that it was a Bull trap, rising stock prices were like balloons that were about to burst. He remained a Bear for over 14 years while the market soared. What went wrong? |
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Mr. Granville's fatal error isthat he went from timing the market to forecasting it. There is an enormous difference between the two. Market timers study indicators of market activity to determine whether it is rising or falling. Forecasters consider economic factors, and whatever else they think is important to predict what the market will do. Market timers need never fail. All forecasters will fail eventually.
Forecasting the market is theoretically far more powerful than timing. Everyone would like to know what the market is going to do, when it will happen and by how much. In the real world, however, nobody has a crystal ball. Forecasting deals with the unknown, and eventual error is certain. The landscape is full of forecasters who have gone wrong. Their stories are well documented, and they were viewed as stars when they were right. Now they are viewed as losers. Joe Granville? He just happened to be the most flamboyant of the bunch. |
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Recently, he too has turned Bullish. Maybe that's something to worry about.
This article is not about forecasting the market. It's about timing, i.e., reading our indicators and letting them tell us when the market is rising or falling. It's about sensing turning points and knowing when to invest aggressively, and when to take defensive actions. We want to buy within five percent of a bottom and sell within five percent of a top. Can we do it? It's really very simple.
The market timing system described below depends upon two key indicators:
1. The Price of the VectorVest Composite, and
2. The VectorVest Recommendation Profile Both indicators were developed by VectorVest, a stock analysis system which analyzes over 6,000 stocks each day for Value, Safety and Timing, and gives Buy, Sell, Hold recommendations on each stock, each day. |
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VectorVest Composite, (04/11/97).
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| Param |
03/07 |
03/14 |
03/21 |
02/27 |
4/04 |
04/11 |
| Price |
21.4 |
21.1 |
20.6 |
20.4 |
19.9 |
19.7 |
| Stop |
20.2 |
20.2 |
19.9 |
19.7 |
19.5 |
19.3 |
| RT |
0.95 |
0.95 |
0.85 |
0.83 |
0.75 |
0.80 |
| Price = Average Price of all stocks in VV database. |
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Stop = Average Stop-Price of all stocks.
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| RT = Average Relative Timing of all stocks. |
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The Price of the VectorVest Composite is the most important indicator used in timing the market. This indicator is the average price of all the stocks in the VectorVest database. It is reported each week in
VectorVest Views, a commentary on the market, along with Stop-Price and Relative Timing in the above manner: When the
Price of the VectorVest Composite is moving in a given direction, the market is moving
in the same direction. As shown above, the Price of the
VectorVest Composite fell each week from 03/07/97 through 04/11/97. Therefore, the market was moving down during this period. The VectorVest Recommendation Profile is the second important indicator
used in timing the market.
It gives the percentage of Buy, Sell, Hold recommendations in
the VectorVest database each day. It is reported in VectorVest Views each week in the manner below. When the ratio of Buys to |
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Sells is above 1.00, themarket
is robust. Correspondingly, the market is weak when the Buy to Sell ratio is below 1.00. As you can see from the above data,
the Buy to Sell ratio was below 1.00 on 03/07/97 and continued to deteriorate through 04/04/97. This confirmed that the market was in a correction. Those of
you with good eyes may have noticed that RT, VectorVest's Relative Timing indicator ticked upward on 04/11/97 even
though the price of the VectorVest Composite went down. RT was sensing a change in momentum of the downward move. Sure enough, the market bottomed two weeks later.
A careful look at the Recommendation Profile shows that on 04/11/97 the percentage Buys increased and the percentage of Sells decreased from the prior week. This was another sign that the correction was nearing completion. From the very beginning, (1988), we recognized
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| that the VectorVest Recommendation Profile provided a measure of the pulse of the market. And it was used to help guide our thoughts on the direction of the market. But it was not until March of 1995, that we discovered how the Price of the VVC clearly signaled the direction of the market. We examined our data back to April 1991 (the time when we first began computing the VVC), and found that tracking the direction of the market with the price of the VectorVest Composite was incredibly simple and reliable. Here's how the system works. If the Price of the VectorVest Composite moves in a given direction two weeks without an intermediate contrary move, it gives a preliminary signal of the market's direction. If the preliminary signal is followed by another move in the same direction, the preliminary signal is reinforced, but not confirmed. We must turn to the VectorVest Recommendation Profile for confirmation of the market's direction. |
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VV REC Profile of 5,860 Stocks in Percent (04/11/97).
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| REC |
03/07 |
03/14 |
03/21 |
03/27 |
04/04 |
04/11 |
| Buy |
19.2 |
12.5 |
8.8 |
7.0 |
5.0 |
5.3 |
| Hold |
56.8 |
58.1 |
54.6 |
55.9 |
52.2 |
53.3 |
| Sell |
24.0 |
29.4 |
36.6 |
37.1 |
42.8 |
41.4 |
| Total |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
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In the data sets shown above you saw that the Price of the VectorVest Composite had been undergoing a steady week-to-week decline, and the ratio of Buys to Sells in the Recommendation Profile was well below 1.00. There was no question that the market was going down. Yet many analysts didn't realize this was happening. The Price of the VectorVest Composite peaked on February 14, 1997, (this is called a Turning Point), and gave a "DOWN" signal two weeks
later on 02/28/97. The Price of the VectorVest Composite finally bottomed 10 weeks later on 04/25/97, 11.0 percent below the price reached on 02/14/97. (You may see this data in Table I. "VectorVest Market Timing Signals," shown at the end of this article.)
Although, we had discovered this timing technique in March 1995, the first major DOWN
signal given in "real time" did not occur until 09/22/95. The market had just completed a marvelous Bull run lasting 39 weeks.
Signs of weakness had begun to appear in July, but the market did not peak until 09/08/95.
Two weeks later we got the DOWN signal. Here's what we said on 09/22/97: "The Price of our VectorVest Composite has now gone down for the second week without an intermediate up move. Our studies have shown that this event signals a market correction. The still favorable investment climate suggests, however, that it will be only a mild correction. It's OK for Aggressive investors to buy high VST-Vector, |
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"B" rated stocks, but Prudent investors should stand aside."
From September 22nd on we tracked the correction week-by-week until it bottomed on January 12, 1996. Two weeks later, we said, "The Price of our VectorVest Composite
rose for the second week in a row, signaling that the market's correction is over. Although the green light has not been confirmed by our Recommendation Profile, it's OK to buy high VST- Vector "B" rated stocks. It's a good time to go Bottom-Fishing.
As shown in Table I, this downturn lasted 18 weeks
and the Price of the VectorVest Composite fell 9.6 percent. This was the so called "Stealth Correction." Small-capitalization and NASDAQ stocks were getting hammered while the mighty Dow Jones Industrial Average was just doing fine, rising 8.9%. This deviation between the blue chips stocks and the rest of the market was just a forerunner of what was to happen for the next 18 months.
And so it has gone from Turning Point to Turning Point, from UP signal to DOWN signal, monitoring the market week after week, never missing a major move. As of the current time, July 18, 1997, the market completed its 12th week of an UP move from a bottom
reached on 04/25/97. When will this UP move end? We don't know. How high will it go? We don't know. But we will know when it ends, and when the next DOWN move has begun. At that |
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time we'll be ready to use Stops, buy Puts, and Sell-Short.
You might believe that the market moves in a random fashion. It does not. While there a periods where the market moves up and down from week to week, it always happens within the framework of an underlying trend. The Price of the VectorVest Composite has reversed itself by going down two consecutive weeks and immediately turning up for two straight weeks only three times in more than six years. Only once, in 1994, has the Price of the VectorVest Composite moved up for two weeks, and then reversed into a downturn. These reversals happened within a flat or "trading range" market. In no case were major moves involved.
This system of timing the market has never failed to signal a major move...and it never will. The reason is quite simple. Big moves start with little moves. Even the apparently abrupt crash of October, 1987 occurred nearly two months after the market peaked in late August, 1987. Since we keep track of every little move the market makes, we will never miss a big move. What more could you ask for? |
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Table I. VectorVest Market Timing Signals
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Date |
VVC |
Weeks |
%Change |
DJIA |
%Change |
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| * |
07/18/97 |
22.7 |
12 |
+16..4 |
7,890 |
+17.1 |
| UP |
05/09/97 |
20.8 |
* |
* |
7,169 |
* |
| TP |
04/25/97 |
19.5 |
* |
* |
6,739 |
* |
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| DN |
02/28/97 |
21.2 |
10 |
-11.0 |
6,878 |
-3.6 |
| TP |
02/14/97 |
21.9 |
* |
* |
6,989 |
* |
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| UP |
08/09/96 |
20.1 |
29 |
-12.3 |
5,681 |
+27.7 |
| TP |
07/26/96 |
19.5 |
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5,473 |
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| DN |
06/07/96 |
22.4 |
9 |
-15.2 |
5,643 |
-5.3 |
| TP |
05/24/96 |
23.0 |
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5,763 |
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| UP |
01/26/96 |
21.1 |
19 |
+11 |
5,272 |
+13.9 |
| TP |
01/12/96 |
20.7 |
* |
* |
5,061 |
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| DN |
09/22/95 |
22.5 |
18 |
-9.6 |
4,764 |
+8.9 |
| TP |
09/08/95 |
22.9 |
* |
* |
4,648 |
* |
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| UP |
12/23/94 |
19.8 |
39 |
+16.1 |
3,833 |
+25.9 |
| TP |
10/09/94 |
19.3 |
* |
* |
3,691 |
* |
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| DN |
10/07/94 |
20.3 |
12 |
-9.8 |
3,843 |
-6.2 |
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If you would like to see how the VectorVest Composite has performed in 1998 please go and "Ride the Wave" with us! 147.2% Gain in the last 13 Months! Can you afford not to know what the market is doing?
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