Stocks & Commodities V. 24:8 (28-31): It’s In The Sentiment by Ajay Jani

Stocks & Commodities V. 24:8 (28-31): It’s In The Sentiment by Ajay Jani

Here’s a quantitative sentiment index based on trading behavior of the Rydex Sector Funds.

With all the debate surrounding the effectiveness of market timing, often the underlying goals of the strategy are forgotten. The principle of market timing is to avoid capital commitments during periods when returns are expected to be subpar and to invest during those times when returns are expected to be above average. Those who complain that they would forgo all of the market’s return by missing the 10 best days of the year fail to mention that they would get slaughtered if they were fully invested on the 10 worst days of the year. During an epic bull market such as the 1998–2000 run, detractors will complain that market timing doesn’t work and that you should be long and strong. These arguments miss the point. The reason to use market timing is not to outperform during raging bull markets or to be invested during the best 10 days of the year. There are two reasons to use market timing:

1. To maximize return on investment by repeatedly turning over your capital in short-term trades. A small edge compounded can add up to a solid rate of return.

2. To protect your hard-earned assets during a crunching bear market that can knock 25–50% off the market. By avoiding these debilitating drawdowns, you have the ability to make fresh commitments of capital when fear is rampant, prices are low, and opportunity beckons.