Market timers develop models to decide when to be in the stock market and when to be out. These models can be based on theories that range from simple technical analysis to complex econometric models. With that in mind, here’s a timing model based on the market performance of a particular interest rate futures contract combined with a set of technical indicators. According to many market pundits, buy and hold is the best way for an individual to create wealth from the stock market. If you were to review the history of the stock market, however, you would see that the buy-and-hold approach requires considerable intesti-nal fortitude, as bear markets are not an easy thing to live through. One approach is to use a market timing model in hopes of forgoing the challenge of coping with bear markets and yet participate in the bull markets. The model would signal when to be invested and when to move to the sidelines. Toward that end, the model should be developed with specific rules as well as show a mathematical historical advantage to capturing a reasonable portion of a bull market but keeping risk at a tolerable level. In this article I explain one market timing model, as well as the steps I undertook in its development. |
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