What is market timing about?

What is market timing about?

Market timing is an investment or trading strategy with an attempt to make decisions of financial assets by predicting how the stock market is going to move. Although it is the opposite of a buy-and-hold strategy, it is still usually investors and portfolio managers who emphasise the use of this predictive method to buy and sell securities. A proponent of market timing will analyse the financial markets, technical indicators and broader economic conditions to determine the best time to enter or exit a particular asset.

What is the market timing strategy?

Market timers believe short-term price movements are important and often predictable. This is why they often refer to the fundamental and technical analyses, statistical anomalies, recurring patterns, and other data that supports a correlation between certain information and stock prices. Market timing is not impossible to do however a market timer’s investment horizon can be months, days, or even hours or minutes.

Two important analyses to consider:

• Fundamental analysis – when an analyst performs analysis on a stock, they put forward some assumption which correlate to the timing of the buy or sell decisions pertaining to the stock. Therefore, this analysis forms a mid-long-term view of its stocks and company’s financial performance.
• Technical analysis takes a short to mid-term view and is based on historical stock performance and investor behaviour.

Nonetheless, the market time strategy is usually to sell at the “top” and buy at the “bottom.” Thus, if interest rates increase, the market timer may sell some or all of their stocks and purchase more bonds to take advantage of what may be a “peaked” market for stocks and the beginning of a boom for bonds.

This strategy is a contrast to passive investors that evaluate an investment’s long-term potential and rely more on fundamental analysis of the company, Particularly the potential behind the security, such as the company’s long-term strategy, the quality of its products, or the company’s relationships with management when deciding whether to buy or sell.

Does timing the market work?

There are various reasons why market timing is difficult or not even possible at all but other market timing strategies have proof that market timing can be practical and profitable endeavour.

Market timing is difficult, if even possible at all for these reasons:

• The Efficient Market Hypothesis is a popular concept that states that all stocks are properly valued at all times based on all available information, never undervalued or overvalued. If, this is true, market timing is impossible since prices will immediately reflect any changes upon new information becoming available.
• Mutual Fund Performance – active fund managers were, on average, able to very slightly time the market. Nonetheless, their net gains were almost entirely consumed in management and transaction fees and thereby had virtually no effect on overall fund performance.
• Conflicting Indicators.
• Looking to the Past.

On the other hand, there are many successful marketing timing strategies, such as:

• Following the trend
• Short-Term Technical Analysis
• The Revised FED Model
• CAN SLIM

The economy and market are every-changing and may introduce new variables or alter old assumptions which can further complicate these strategies. The answer to this question is subjective to the investor. But it remains to be seen which of these market timing strategies will stand the test of time and what new ones will be developed however the problems of market timing will always remain.

Is market timing illegal?

Market timing is legal, permissible and engaged in by investors, although it is often a discouraged practice due to its high risk and similarity to gambling as it based on chance.

In fact, most of the prosecutions over market-timing arise when fund managers violate their company’s policies and their fiduciary obligation to their investors by permitting big clients to engage in abusive trading. But the issue does not arise from short term trading.

What is usually considered the biggest risk of Market Timing?

The biggest risk of market timing is fundamentally losing money, which is very easy to do when Market Timing because economy systems are complex and it is very difficult to predetermine market movements.

Additionally, financial advisors often agree that investors have poor timing, becoming less risk averse when markets are high and more risk averse when markets are low. This strategy that will actually result in less wealth in the long-term compared to someone who consistently invests over a long period regardless of market trends.

What are the market timing regulations?

Market timing is legal. However, there are certain regulations, such as MAR (Market Abuse Regulation) in place to guarantee the integrity of European financial markets and increase investor confidence. Any unlawful behaviour in the financial markets is prohibited. The concept of market abuse typically consists of insider dealing, unlawful disclosure of inside information and market manipulation.

Directive 2003/6/EC of the European Parliament and of the Council (MAD), entered into force on 12 April 2003, aims to create a level playing field for all economic operators in the Member States. This is part of the effort to combat market abuse by: reinforcing market integrity, contributing to the harmonisation of the rules, establishing a strong commitment to transparency and requiring a closer co-operation between national authorities.

MAR aims to improve market integrity and investor protection and so updates and strengthens the existing MAD framework. Furthermore, MAR empowers ESMA (European Securities and Markets Authority) to develop draft regulatory technical standards (RTS) and implement technical standards (ITS).