Timing the Market vs. Forecasting Market Direction
To make money in the stock market, one needs to know when to ‘get in the market’ and when to ‘get out of the market’ – this is called ‘Timing the Market’. To use a sports (baseball) analogy, one needs to watch the ball carefully when deciding when to swing your bat – swinging too soon or too late may mean the difference between a homerun or a strike out! Likewise with timing the market, one needs to watch carefully and wait to decide when to ‘get in’, and just as carefully to decide when to ‘get out’ of the market. Timing the Market is very different from forecasting (or predicting) what the market is going to do. People often get the two confused. Forecasting market direction implies one can tell accurately what the future will bring. Some investors may be quite skilled in analyzing a company’s fundamentals, earnings patterns, and other attributes to make educated guesses of what the company might do in the future; some traders may be very skilled in analyzing stock chart patterns and other technical indicators. However, no one can definitely predict what the market will do in the future, and if a year from now the markets (or a particular stock) will be higher or lower. Timing the market, however, is recognizing what the market IS doing, and making a decision to follow its guidance. Unlike forecasting the market, timing the market can be done, and is currently being done by many successful investors and traders. Successful timing the market is all about good technical analysis of stock charts, of understanding what the market (or stock) is doing than ‘how good the market (or stock) is (termed ‘fundamental analysis’). Timing the market can be done as simply as watching what short-term moving averages (like a 20SMA or 50EMA) do when compared to longer-term moving averages (like 65 EMA or 200 EMA). Such simple timing signals can be generated using free websites (www.stockcharts.com), however, just as craftsmen of other trades (like carpenters, machinists, etc) have “tools of their trade”, so also do successful investors and traders. This article is about Timing the Market with VectorVest – with details that users can investigate for themselves. The article is focused on showing traders how to use options to make money using a trading system. Similar option strategies can be used with other technical software. – successful traders find one that they can easily understand and use. See ‘How to Trade’ and ‘Trading Systems and Methods’
The VectorVest Method for Timing the Market
VectorVest analyzes, sorts, ranks and graphs over 18,300 stocks daily for Value, Safety and Timing, and assigns a number (from 0 to 2) for each stock for their relative value (RV), relative safety (RS) and relative safety (RT). Based on the individual numbers, VectorVest assigns a BUY, SELL or HOLD recommendation for each stock in its database. In addition, VectorVest monitors the movement of the overall market by monitoring the movement of the VVC (Vector Vest Composite), which is an average of all the stocks in its database. By combining the price trends of the VVC, the RT of the VVC and the ratio of BUY versus SELL recommendations in its database into a master indicator (the market timing indicator – MTI), VectorVest is able to make recommendations that assist with timing the market. To help individual investors and traders plan their investing and trading, VectorVest publishes an essay at the end of each trading day interpreting the changes and significance of their market timing indicator (the MTI).
How To Make Money Using the Market Timing Indicator
Most investors and traders know that the way to make money in the stock market is to “buy low and sell high”. However, what many investors and traders do not know or realize is that most stocks are greatly affected by the movement of overall market. Just as a ‘rising tide lifts all ships’, when the overall market is rising most stocks do so as well. Hence, interpreting the movement of the overall market (timing the market) is crucial to making money in the stock market. VectorVest’s MTI has made timing the market easy for individual investor and trader – when the MTI (on a scale of 0 to 2) approaches or falls below 0.6, the market is ‘searching for a bottom’, when the MTI approaches or rises above 1.6, the market is getting ‘top heavy’, and traders should ‘tighten their stops’ to protect profits.
When the MTI makes a ‘bottom’ and is rising, VectorVest’s essay will advise investors and traders when it is safe to buy high VST stocks to make money. Given that investors differ in their tolerance for risk, VectorVest issues three different timing signals – one for the conservative investor (Confirmed Up calls), one for the aggressive investor (the Primary wave), and one for those in between (the DEW signal). As would be expected, the more aggressive investors have the potential to make more money in the market as they would enter the markets earlier than conservative investors; however, they also run the risk of being ‘whipsawed’, and having to exit a trade sooner, if the market changes course (a ‘fake out’). For more details of these timing signals, see VectorVest’s homepage.
Examples of how to use the Market Timing Indicator in Stock Options Trading:
While most investors will buy the stock itself, the stock options trader has a great advantage over the pure stock investor as one can tailor one’s trades to fit one’s trading style and risk tolerance, yet achieve greater returns/risk than the pure stock investor.
- Bull Put Credit spreads – the ultra conservative trader can sell credit spreads far out-of-the money on high VST stocks or Rule#1 stocks. These trades have a very high probability of profit allowing the trader to make money if the stock rises, stays at the same level or even falls a modest amount.
- Bull Call Debit spreads – these trades are more aggressive than the above mentioned credit spreads, and have a good balance of profit for risk undertaken.
- Single Leg Call purchases – these are best for aggressive investors and traders who are extremely bullish on a particular stock. The upside profit potential is ‘unlimited’, and the risk is limited to the cost of the option bought.
COMPARISON OF DIFFERENT STOCK OPTION STRATEGIES
The following table shows a comparison of the differences in the profits of the above three strategies as compared to the stock purchase alone and investing in the stock market index (Dow Jones).
An example of the great advantage smart traders using the right ‘tools of the trade’ have is shown here – VectorVest’s DEW signal turned UP on 12/22/2011 – assuming the beginning investor or savvy trader sees this on the evening of 12/22/2011 after he/she returns from work and decides to enter the market the next day with a trade on the top VST stock of the Liquid Stock List he/she has been monitoring. The top VST stock on 12/22/2011 of the liquid stock list maintained on this website was APPL (Apple, Inc).
As can be noted above, the stock purchase itself yields a good return (24.49%) compared to the DJI’s 5.33% for the same period. However, it pales in comparison to the returns generated by the different stock option strategies as noted above. Such is the power of stock options trading!! Of course, everyone will have different outlooks in terms of how bullish they might be in a given market – hence, each will choose a different strategy.
Put the VectorVest Market Timing System to the Test
For those interested in learning more about the VectorVest system, and to check the above details – VectorVest offers a 5-week trial of the full and complete VectorVest system for a nominal $9.95 fee that is refundable with a 100% guarantee if you are not completely satisfied for any reason. Checkout the VectorVest home page for a video overview of the VectorVest stock analysis and portfolio management system.
The best way to find out whether a trading system will help you make money is to test it yourself – the VectorVest system allows the user to ‘go back in time’ to test whether stocks he/she would have picked would have made money. This back-testing feature is invaluable to serious investors and traders as it allows one to test systems without losing money in the real world – besides, 5 weeks is plenty of time to test the system without losing any money at all !