Are market timing indicators a myth, or could they really help you beat the market? Here’s the truth about these magical beasts.
Timing is everything. Just ask Marty McFly and Doc Brown. In the original “Back to the Future,” the only way Marty could leave 1955 and get home to 1985 was to channel a lightning strike to the time-traveling Delorean, thereby powering the car to travel through time. Thanks to the fact that Marty had come from the future, they knew exactly when lightning would strike - and where: The Hill Valley Courthouse clock at precisely 10:04 p.m. on November 12, 1955.
Market timing indicators are a bit like that. If you have the right information, you could figure out where lightning will strike. Or more accurately, you can determine whether it’s a good time to buy or sell stocks. The problem is that there are more than a few market timing systems out there. Some are okay, and most will work for at least a short period of time, but then not work at all. As much as that can complicate things, once you simplify and test your indicators, it’s not as complicated as it seems.
When it comes to market timing indicators, simple is best
There are three market timing indicators we rely on most here at Cabot. And the good news is that they have nothing to do with the dollar, oil prices, interest rates or, thankfully, politics—instead, it’s all about determining which way the market is headed, and staying in gear with that.
The Cabot Trend Lines
The Cabot Trend Lines are our unique way of determining the long-term trend of the stock market. As long as both the S&P 500 Index and the Nasdaq Index fluctuate above their respective trend lines, we consider the market to be bullish. If both indexes are below their trend lines, we are in a bear market.
The Cabot Tides
We use five different market indexes to help us determine the overall intermediate-term direction of the stock market. They are: S&P 500, NYSE Composite, Nasdaq Composite, S&P 600 Small Cap and S&P 400 MidCap. The market is considered to be advancing on an intermediate-term basis if at least three of these five indexes are advancing. And contrarily, the market is deemed to be declining if at least three of these five are declining.
The Two-Second Indicator’s specialty is detecting market tops. When the number of daily new lows on the NYSE is greater than 40 while the major indexes are rising to new peaks, look out! It’s telling you that, internally, sellers are in control of most stocks, and the indexes are masking this weakness. However, if new lows expand to greater than 40 after the indexes are five days or longer off their peaks, the Two-Second Market Timing Indicator is simply telling you the market is entering a correction. This correction could be deep, and thus you should still practice caution. Finally, when new lows are less than 40 day after day, that’s a sign of a healthy, robust market – the buyers are firmly in control of most stocks.
If you want to find out more about reading stock charts and following trends, download your FREE copy of Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons.
What questions do you have about market timing indicators? Let us know in the comments below.