“Market timing” is a term that gets tossed around a lot—but what does it truly mean, how realistic is it, and how can an investor make sense of it? In this article, we’ll answer: what market timing is, the pros and cons, and we’ll highlight how Cabot’s Chief Investment Strategist (and veteran analyst) Mike Cintolo uses his proprietary market-timing indicators (including the Cabot Trend Lines and Cabot Tides) to try to stay on the right side of the broad trend.
What Is Market Timing?
At its core, market timing is a strategy for entering and exiting a stock (or bond, commodity, cryptocurrency, etc.) at the “right” moments, e.g., entering before a broad up-move and/or exiting ahead of a broad decline. It’s the idea of aligning your portfolio with the dominant trend rather than simply “buying and holding” irrespective of market cycle.
In practice, you achieve success through three key steps:
- Recognizing the major trend (bull market vs bear market) or intermediate trend.
- Adjusting your market exposure accordingly: raising cash or hedging when a downturn looms and increasing risk when strength is emerging.
- Using signals or indicators (data, price behavior, moving averages, breadth measures) to help determine the shift from one regime into another.
While timing the exact day of a market turn is notoriously difficult, many investors and advisors focus instead on trend-based timing: staying invested when the trend is favorable and trimming or moving more defensively when the trend deteriorates.
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Why Market Timing Matters
Here are some of the reasons why market timing can be useful for investors:
- Capital preservation: If you can recognize when the dominant trend is reversing from bullish to bearish, you can reduce portfolio drawdowns.
- Opportunity capture: Getting back into the market early in a new up-leg allows you to participate in the major upside, rather than chasing after the big move.
- Psychological discipline: Having defined rules or indicators helps reduce emotional decisions during volatile times.
- Trend leverage: Some of the strongest gains in stocks occur in sustained uptrends (the big money is made in the big swing); staying invested during these moves can be portfolio game-changers.
But attempting to time the market isn’t without its own risks, such as the risk of being “whipsawed,” when an investor enters a trade on what looks like a clear new trend only to have it reverse, or missing out on upside (or staying in a stock for too long) if the investor doesn’t identify the new trend quickly enough.
How Cabot Approaches Market Timing
Mike Cintolo, Cabot’s Chief Investment Strategist, is our award-winning, go-to market timer. During his decades of trading, he’s developed a number of reliable stock market timing indicators, but the two we want to highlight today are the Cabot Trend Lines and the Cabot Tides.
1. Cabot Trend Lines
- This indicator is a long-term trend signal. It uses the 35-week moving average of broad indexes (specifically the S&P 500 and the Nasdaq Composite) to define the major trend.
- If both the S&P 500 and the Nasdaq close two straight weeks above their 35-week lines, it’s considered a bullish trend. If both close two straight weeks below the lines, it signals a bearish trend.
- The idea is that this isn’t meant to capture short-term trading signals, but to keep the investor aligned with the major market trend: Leaning optimistic for the vast majority of bull markets while keeping mostly out of the vast majority of prolonged downturns.
2. Cabot Tides
- This is more of an intermediate-term trend indicator. It is based on five major market indexes: S&P 500, NYSE Composite, Nasdaq Composite, S&P 600 SmallCap and S&P 400 MidCap.
- For each of the five indexes, you compare its 25-day and 50-day simple moving averages (SMA). If at least three of the five indexes are (a) above the lower of its two moving averages, and (b) that moving average is advancing, then the Tides indicator counts as bullish. If at least three of the five go decisively below the lower average, it triggers a sell (or more cautious) signal.
- The advantage: It attempts to catch every major market advance and avoid major decline by following the momentum of broad indexes. The trade-off: it may result in some missed early weeks of a new uptrend (because the moving averages need time to signal) and the occasional whipsaw when the trend reverses quickly.
Why These Matter
Using these two indicators in tandem has allowed Cabot to be on the right side of the major trend through events like the Internet bubble, the Great Recession and the 2022 growth stock selloff. For an investor who wants to stay oriented to the big picture rather than trade every wiggle, these tools are meant to provide a clear go/no-go framework for equity exposure.
If you are planning on practicing market timing in your own portfolio, there are a few steps you need to take first.
- Define your time horizon: Are you investing for decades (buy & hold) or do you want to adjust exposure based on market environments? Long-term investors can make tactical portfolio changes but are better off not trying to time the market.
- Use trend confirmation, not prediction: It’s important to note that the two indicators mentioned above are lagging by design (moving averages are averages of trading that’s already happened). They don’t attempt to predict the exact turn but signal when the trend has changed.
- Be clear on your rules: A system like Trend Lines or Tides works only if you commit to defined criteria (e.g., two weeks below/above moving average, three of five indexes, etc.).
- Balance exposure: Timing signals don’t mean all-in/all-out necessarily—they can suggest more or less exposure, hedging, or focusing on more resilient subsectors.
- Expect whipsaws and missed weeks: Even a well-designed trend system will occasionally lead you out early or cause you to miss a few weeks of recovery. That’s part of the cost of doing trend-based timing.
- Don’t ignore fundamentals and valuation: Timing indicators help with broad trend identification, but they don’t replace analysis of individual companies, valuations, sector rotation, or macro-drivers.
Market timing isn’t about predicting the exact top or bottom; it’s about recognizing when the broad wind is at your back (or not) and adjusting your sails accordingly. By understanding major-trend signals (like moving averages) and intermediate-trend indicators (like momentum across multiple indexes), you can tilt your portfolio toward growth when the trend is favorable and exercise caution when signs of deterioration emerge.
The Cabot Trend Lines and Cabot Tides are two examples of disciplined, rules-based timing frameworks that many growth-oriented investors may find useful. While no system is perfect, having a structured approach to market timing can help you stay aligned with the broader trend and avoid letting emotion drive your investment decisions.
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