Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Further Gold Price Pressure as the USDX Is About to Rally - 23rd Oct 20
Nasdaq Retests 11,735 Support - 23rd Oct 20
America’s Political and Financial Institutions Are Broken - 23rd Oct 20
Sayonara U.S.A. - 23rd Oct 20
Economic Contractions Overshadow ASEAN-6 Recovery - 23rd Oct 20
Doji Clusters Show Clear Support Ranges for Stock Market S&P500 Index - 23rd Oct 20
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Secrets to Successful Market Investment Entry and Exit Timing

Stock-Markets / Investing 2009 Dec 09, 2009 - 08:11 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleShah Gilani writes: Many so-called experts would have you believe that it's impossible to "time" the markets. That's just not true. There's actually a secret to market timing. It's not just a matter of the economy. It's a matter of how perception and collective psychology gauge the risk of realizing a real profit - doing so with shifting economic conditions as the market's backdrop.

This works for all the markets, including stocks, bonds, commodities, precious metals and currencies.


Look back to 2007-2008 and you'll see that a handful of players got the "timing" right and made billions of dollars. Ever heard of John A. Paulson? He made what is being called the "greatest trade of all time." His hedge fund shorted the sub-prime market and raked in some $15 billion. Paulson's take was a little less. He personally pocketed $4 billion - the equivalent of $10 million a day for the relatively short stretch it took for this trade to play out.

While you wouldn't have been able to amass the capital, leverage, structured positions and risk tolerance of Paulson & Co., you could have seen what Paulson saw, and made a killing. At least you could have saved your portfolio by going to cash before what was already a bad situation got a lot worse.

As for the rally in stocks that started back in early March, there have been plenty of big winners. Goldman Sachs Group Inc. (NYSE: GS) is raking in record profits. Several hedge funds made back their losses and are gearing up both for major profits and for a resumption of the coveted performance fees they'd grown used to collecting until the financial crisis hit.

There's no reason for you to have missed this rally, either. How much you would have made, again, has to do with your personal allocation of capital and tolerance for risk. But if you had employed a "timing" strategy, you would have effectively purchased a seat on the gravy train.

Using the aforementioned examples, let's look at how to generally time market entry and exit opportunities and see how you could have called the housing collapse and correctly timed the March rally.

The tipping point for Paulson & Co. was an analysis of how far housing prices had skyrocketed from historic growth rates. Paolo Pellegrini, Paulson & Co.'s brilliant analyst, also determined how far prices had to fall, or "regress," to get back to their historic norms. And while Paulson was early to the trade - and was actually able to add to his positions even as they initially went against his fund - you didn't need to catch the very top of this play to reap the resultant windfall.

In fact, the No. 1 lesson of market timing is this: It's never a good idea to try and time tops and bottoms.

Leave that to the swing-for-the-fences professionals whose careers prepare them for such risk-taking. Joining the party after it's already started - and then riding along as the trend strengthens and plays out - is a lot safer than being hopeful your mere presence will attract a crowd.

Timing requires a big-picture, top-down perspective. Here's how I look at the big picture: Identify the largest constituent elements that move the stock, sector, industry or economy you are measuring. For housing, I look at the availability of credit, the cost of credit, the trajectory of growth, and the sustainability of those trends.

In 2007, I used Countrywide Financial Corp. and IndyMac Bancorp. Inc. (OTC: IDMCQ) as proxies for credit availability, and I used interest rates on adjustable rate mortgages (ARMs) and the profitability of big banks as a proxy for the cost of credit. I followed the trajectory of growth around the country simply by reading the real estate sections of newspapers. By the fall of 2007, it was easy to see strains on the proxies I was watching, even though closer to home everything looked rosy.

Both Countrywide and IndyMac faltered. That told me there was a problem with the sustainability of credit extension, especially in the subprime-mortgage market where both had made a giant push. You didn't need to read their balance sheets or income statements, the newspapers were full of telltale stories. There was plenty of evidence that teaser rates were giving way to higher rates and strains were developing on borrowers.

At the same time, big banks were having a harder time syndicating and selling off covenant-lite debt pools of leveraged loans. And there was plenty of noise about banks' shaky structured investment vehicles (SIVs), created to finance and hold risky mortgage-based assets off of their balance sheets. It became obvious that none of the trends that propelled housing were sustainable. You could just have easily seen it, too.

The tipping point for me was a couple of big quarterly losses at Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). The ultimate proxy for the entire housing market was flashing red; it was time.

No, I didn't catch the top. But, I told the readers of my blog to get out of the markets entirely and into cash in February 2008. Not cash proxies like money market funds. I mean cash.

If you were employing a timing strategy, even if you missed the exact turn - as I did - you would have locked in built-up profits, as opposed to losses.

You do that by applying the second lesson of timing: Because no one has perfect timing, a timing strategy requires investors to place profit-target orders and stop-loss orders across their portfolio holdings.

Lots of you had soaring profits in the run-up to late 2007. And even if you employed a "dance-‘till-the-music-stops" strategy, if you didn't take profits and didn't have stop-loss orders in place, when the music did stop you fell on your rear.

The lesson here is that exact timing is impossible. But profitably timing your exits is a simple matter of emphasizing prudence over greed.

In 2007, investors put little stock in a collapse of the housing market. That was evidenced by the tiny risk premiums investors were demanding on housing-related debt. By March 2009, quite the opposite was happening.

Perception and psychology had certainly changed. The perception that we were headed over a cliff and the collective psychology to avoid any further pain created a giant spread in the risk premium investors applied over non-existent growth prospects. And again there was a flashing light that market timers saw as a beacon.

While I can't speak for the other market timers that got it right, I can tell you that although I missed the exact turn, I am on the record in Money Morning calling for a strong rally from the end of March.

My timing lights were flashing because the risk premium (implied perception and psychology) for holding financial assets had created a spread so wide that even the hint of potential profitability would trigger a rally. It looked like it may have started, but I needed a macro model to analyze the whole market.

I used a simple supply-and-demand equation to stress test the timing of my desire to re-enter the market. My proxy for "supply" was the actual level of shares outstanding in the market (a level that had fallen dramatically over the previous decade) - and their newly cheaper prices. My proxy for demand was cash on the sidelines and the difference between investors' holdings of short-term U.S. Treasuries before the crisis and those same holdings at the beginning of March.

At some tipping point, it was obvious that no matter what the perception and psychology actually was in the marketplace, even a few small waves of demand had the potential to swirl into an investment tsunami that would take prices higher. When I saw prices rising on increasing volume, I knew that successive waves would continue to lift prices, regardless of actual profitability or sustainability of corporate earnings.

Given what we've learned from these recent experiences, the question is now very clear: Where do we go from here?

Well, there are two destinations in the future. One is near and the other is farther on up the road. We need to discuss them both.

In the near term, good timing will be a function of the supply-and-demand equation. Stocks should go higher as more money comes off the sidelines and out of low-yielding U.S. Treasuries. Who knows how high the markets can go if retail buyers actually become buyers again?

Make sure to employ profit targets and reasonable stops. I suggest 15% lower than your point of entry.

Timing is more important when looking farther up the road. We're going to have to see real sustainable growth in profitability - well above the anemic levels that currently pass for robust when compared to the dark days of 2008.

Frankly, it's a race. Will an economic rebound generated by massive government stimulus make up for - and even surpass - the still-stalled engines of our consumer-driven economy? Or will weak fundamentals swamp a fragile recovery when government-support systems are dismantled?

As never before in the modern era, timing is going to be critical to investors. There will be no more dart throwing, no more sitting back and watching all boats rise with the tide. There will be no more one-way bets.

The nature of an increasingly global economy will show its own propensity for swiftly moving capital. And if investors don't become adept at timing, time will run out on their prospects for grabbing and keeping fleeting corporate profits, a key part of the march to amass truly permanent wealth.

[Editor's Note: Shah Gilani is a retired hedge-fund manager and a leading expert on the global credit crisis. In March, Gilani predicted that a strong rebound in U.S. stocks was in the offing - a forecast that proved to be both timely and accurate.

In November 2008, Gilani warned investors about five key credit-crisis "aftershocks" that threatened the health of the world economy and stock markets - but that, if played correctly, also posed some of the best profit opportunities in years. Each of the five predictions played out just as he projected.  To check out Gilani's aftershock predictions, please click here.]

Money Morning/The Money Map Report

©2009 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules