February 6th, 2008

Market Timing Indicator (MTI)

I’m back! As you may or may not have noticed, I’ve been MIA missing in action since last summer. The reason is that I was writing a book that I’ve now entitled, “Running with the Herd”. And, if I don’t say so myself, I think it’s going to be enlightening and helpful for most individual investors.

When I started writing, the sub-prime meltdown was just starting to rear its head and the bull market was still in tact. I was still focusing, along with most other investors, on finding great stocks and avoiding those that were too risk or were already in a downtrend.

At the same time, I was furiously writing page after page about charting techniques for picking winners. I was approaching what would have been the final chapters when the reality of the market’s weakness dawned on me. It was late November and, after the S&P 500 briefly sticking its nose above its previous all-time 2000 high, it again failed to move new highs.

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I started getting anxious and losing some sleep. I realized I need to broaden my upcoming book with something to help individual investors navigate a declining market.

I didn’t want to rely on the conflicting opinions of the media and talking heads but instead wanted the market to send its own message. So I started massaging the daily data on 44 years of S&P 500 Index …. that’s over 11,000 records. It was a huge amount of information and I needed to somehow synthesize it all and condense it into more manageable number of data points. I wanted to build a statistical data base of probabilities based on historical experience.

I ultimately arrived at what I now call a Market Timing Indicator (MTI). The indicator is like a thermometer. A thermometer won’t predict when you’re going to have a fever; it merely tells you when you do. And if you do get a fever, you know that you have to take some aspirin and get some bed rest. Similarly, the MTI doesn’t predict the future but it does tell you when the market is sick and when you need to get some rest from it. The MTI will also likelihood of alternative outcomes, will tell you when the condition has improved and, if the risks have passed, that it’s o.k. to get back into the market.

How do I know this? Because I back tested the MTI against the 44 years of daily trading back to March, 1963. If I had bought $1000 in a basket of S&P 500 stocks (or the SPY etf had it existed throughout that period) on a buy-and-hold strategy, that portfolio would have grown to $22,414 by 12/31/2007. But, following the signals dictated by the MTI over the same period (through 3 bear markets, through 2 crashes, through the longest bull market on record), that same initial investment of $1000 would have grown to $50,171! And, with the increased confidence provided by the MTI, had I been on margin when the MTI said there was little risk of a correction, bear market or crash, the $1000 would have grown to a whopping $258,602!

Do I have you sufficiently hooked? What does the MTI say now? As of yesterday’s 3.2% drop in the S&P 500, the value of the MTI changed from 16205 to 17105 (the higher the number the more bearish). Over the past 44 years of market history, there have been 19 instances when the MTI read 17105 and in 15 of those the market finished its run down; it finished up at the end of only 4. The average decline during those runs was -2.62% with 6 being greater than -2.00% with the largest being -10.74% in 1966.

After 17105, the MTI recovered 63% of the times to a value of 13684. But in 37% of the occurences, the MTI continued to decline to a value of 21605 the most bearish!

If you’re interested in learning more, write me, continue reading this blog and buy the book, “Running with the Herd”.

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  • jaynemeth

    I need a copy of your book.When can I get it??
    Sincerely
    J.M.