October 22nd, 2010

IBD and Market Timing? I Don’t Think So

I was an avid subscriber to Investors Business Daily for many years and envied to returns they were able to generate through their top 100 stocks. They said that if I followed their CANSLIM methodology I too could generate comparable returns for my portfolio. But it wasn’t as easy as they claimed. My portfolio just wasn’t matching theirs.

But then the Financial Crises Crash hit towards the end of 2007 and the market imploded with a 57% decline. Fortunately for me, in my attempts to emulate their approach I realized that it was probably more important to time the market well that it was to pick stocks well. The amount of money that you lose during major down turns can almost totally wipe out any profits you made in the bull market leading up to the Bear Market. That’s especially true during the secular bear market we’ve unfortunately had to endure for the past 12 years.

IBD may be excellent at identifying stocks leading the market but they do so in a vacuum without any apparent concern for market timing, without giving any recognition to the fact that there are times when it doesn’t matter how good your stocks are they’re not going to be good enough, that upside momentum can lead to out-sized gains but downside momentum can also lead to out-sided losses:

While the Financial Crisis Crash S&P 500 collapsed the market by about 57%, the IBD 100 stocks were decimated by around 85%! Sure, they’re coming back but how good would their performance had looked had their approach be able to anticipate the coming crash and signaled that an exit was crucial. [No broker, advisory or newsletter service will suggest that probably because of the fear of losing subscription or fee revenue.]

At the end of 2007, I developed a market timing indicator that signaled a major decline was probably immanent. I have since translated the indicator into a simple “Market Security Meter” similar to the Homeland Security’s Terror Alert system:

O.K., so it’s not that original but it works. And what does the MSM indicate now? Yesterday it was indicating Pause (a caution light). But I know for a fact that as of today, if the market closes ends about where it is now (1182.11 at 12:40) the signal will change color and flash a different signal. Every time I send an Alert, subscribers to the service see the current MSM indicator; when it changes or is about to change, I send out a special alert.

Having a successful process for picking good stocks gives you a terrific advantage but avoiding the kind of damage as suffered by the IBD 100 list during the Financial Crisis Crash gives you a true edge for getting far ahead over the long run.

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  • Anonymous

    if you take your profits at 25% and have a stop loss at 8% you should be 100% in cash during bull markets.

  • Anonymous

    The "Big Picture" column of the IBD signaled the market was in a correction in 2007. If one follows the IBD methodology properly you would have been locking in gains at the beginning of the downturn. Skilled CANSLIM investors would know that 3 out 4 stocks follow the market direction.

    P.S. Nothing against stockchartist, but IBD doesn't simply advocate buy and hold.

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