Timing the Market

Time the market with a system that has never failed

Being on the wrong side of the market is the worst thing that can happen to an investor. It doesn't have to happen to you. VectorVest has signaled every major market turn since 1991. Every one of these signals are documented in "The VectorVest Views".

11/1/07 (Down) "Share prices fell sharply today as investors began to fear the end of interest rate decreases along with a slower economy. This is not a good recipe for driving stock prices higher. Prudent Investors should not buy stocks at this time and take profits. Aggressive Investors and Traders should play the market to the downside."

"The VectorVest Views"
by Dr. Bart A. DiLiddo
November 1st, 2007

Old Joe Granville always said the market tells its own story. All you have to do is read what it is saying. Unfortunately for him, he didn’t take his own advice.

Joe Granville was one of the pioneers of technical analysis. He used several novel methods of "reading the market." The most popular of which is On Balance Volume.

Initially, he was quite successful, and became the market "Guru" of the early 1980’s. He was so influential that his forecasts became self-fulfilling prophecies. Then he missed the call on the greatest Bull market of all time. On August 16, 1982, the market broke out of a steep slump, and Joe Granville said it was a folly. He said that it was a Bull trap, rising stock prices were like balloons that were about to burst. He remained a Bear for over 14 years while the market soared. What went wrong?

Mr. Granville’s fatal error is that he went from timing the market to forecasting it. There is an enormous difference between the two. Market timers study indicators of market activity to determine whether it is rising or falling. Forecasters consider economic factors, and whatever else they think is important to predict what the market will do. Market timers need never fail. All forecasters will fail eventually.

Forecasting the market is theoretically far more powerful than timing. Everyone would like to know what the market is going to do, when it will happen and by how much. In the real world, however, nobody has a crystal ball. Forecasting deals with the unknown and eventual error is certain. The landscape is full of forecasters who have gone wrong. Their stories are well documented, and they were viewed as stars when they were right. Now they are viewed as losers. Joe Granville? He just happened to be the most flamboyant of the bunch. Recently, he too has turned Bullish. Maybe that’s something to worry about.

This article is not about forecasting the market. It’s about timing, i.e., reading our indicators and letting them tell us when the market is rising or falling. It’s about sensing turning points and knowing when to invest aggressively, and when to take defensive actions. We want to buy within five percent of a bottom and sell within five percent of a top. Can we do it? It’s really very simple.

The market timing system described below depends upon two key indicators:

  1. The Price of the VectorVest Composite
  2. The VectorVest Recommendation Profile

Both indicators were developed by VectorVest, a stock analysis system which analyses over 8,000 stocks each day for Value, Safety and Timing, and gives Buy, Sell, and Hold recommendations on each stock each day.

The Price of the VectorVest Composite is the most important indicator used in timing the market. This indicator is the average price of all the stocks in the VectorVest database. It is reported each week in VectorVest Views, a commentary on the market, along with Stop-Price and Relative Timing in the following manner:

TABLE 1 - VECTORVEST COMPOSITE (as of 4/1/10)
Date Price Stop RT
02/26 23.60 22.27 1.00
03/05 24.52 22.61 1.10
03/12 24.81 23.05 1.09
03/19 24.81 22.90 1.06
03/26 24.85 22.97 1.06
04/01 25.16 22.13 1.08

PRICE:
Average Price of all of the stocks in the VectorVest Database

STOP:
Average Stop-Price of all of the stocks in the VectorVest Database

RT:
Average Relative Timing of all of the stocks in the VectorVest Database

When the Price of the VectorVest Composite is moving in a given direction, the market is moving in the same direction. As shown above, the Price of the VectorVest Composite rose each week from 02/26/10 through 04/01/10. Therefore, the market was moving up during this period.

The VectorVest Recommendation Profile is the second important indicator used in timing the market. It gives the percentage of Buy, Sell, and Hold recommendations in the VectorVest database each day. It is reported in VectorVest Views each week in the following manner:

TABLE 2 - VECTORVEST RECOMMENDATION PROFILE (as of 4/1/10)
Date Buys Holds Sells
02/26 18.0% 54.0% 18.0%
03/05 33.0% 54.0% 13.0%
03/12 32.0% 57.0% 12.0%
03/19 29.0% 57.0% 14.0%
03/26 29.0% 56.0% 14.0%
04/01 34.0% 53.0% 13.0%

When the ratio of Buys to Sells is above 1.00, the market is robust. Correspondingly, the market is weak when the Buy to Sell ratio is below 1.00. As you can see from the above data, the Buy to Sell ratio was above 1.00 on 02/26/10 and continued to increase through 04/01/10. This confirmed that the market was trending up.

From the very beginning, (1988), we recognized that the VectorVest Recommendation Profile provided a measure of the pulse of the market. And it was used to help guide our thoughts on the direction of the market. But it was not until March of 1995, that we discovered how the Price of the VVC clearly signaled the direction of the market. We examined our data back to April 1991 (the time when we first began computing the VVC), and found that tracking the direction of the market with the Price of the VectorVest Composite was incredibly simple and reliable.

Here’s how the system works. If the Price of the VectorVest Composite moves in a given direction two weeks without an intermediate contrary move, it gives a preliminary signal of the market’s direction. If the preliminary signal is followed by another move in the same direction, the preliminary signal is reinforced, but not confirmed. We must turn to the VectorVest Recommendation Profile for confirmation of the market’s direction.

In the data sets shown above you saw that the Price of the VectorVest Composite had been steadily increasing week to week, and the ratio of Buys to Sells in the Recommendation Profile was above 1.00. There was no question that the market was going up. The price of the VectorVest Composite peaked on April 23, 2010, (this is called a Turning Point).

On April 30, 2010 we said "It may turn out that last Friday’s closing price of $26.29 for the VectorVest Composite will be the rally high as it appears that a consolidation is setting in. All we need is to see is a red light in the price column of the Color Guard and we’re taking our longs off the table. Prudent Investors should not buy stocks at this time. Aggressive investors and traders should play the market with a bias to the downside." On May 4, 2010 the red light we were looking for in the Color Guard appeared, and we said "Growing concerns over Greece’s debt weighed on investors’ minds again today, causing the mighty Dow to plunge more than 225 points. Prudent investors should not buy stocks and aggressive investors and traders should play the market to the downside."

The Dow collapsed 1,010 points on May 6, 2010, recovered during the day and closed down 341 points. We received a Confirmed Down on May 7, 2010 as the price of the VectorVest Composite moved lower over two consecutive 5-day periods and the Buy/Sell ratio was below 1.0. Our analysis concluded "In regard to where this market is heading, the good news is that first quarter earnings reports have been grand and today’s jobs report was quite favourable. These factors would normally trigger an explosive rally, but these are not normal times. The debt problems in Greece and around the world are casting a pall over the viability of a long-term global economic recovery and that’s very bad news."

TABLE 3 - VECTORVEST MARKET TIMING SIGNALS
VectorVest Market Timing Signals

As of the current time, July 09, 2010 the market completed its 11th week of a DN move from a high reached on 04/23/10. When will this DN move end? We don’t know. How low will it go? We don’t know. But we will know when it ends, and when the next UP move has begun. At that time we’ll be ready to buy long. You might believe that the market moves in a random fashion. It does not. While there are periods where the market moves up and down from week to week, it always happens within the framework of an underlying trend.

This system of timing the market has never failed to signal a major move...and it never will. The reason is quite simple. Big moves start with little moves. As early as November 1, 2007, just 92 cents off the VectorVest Composite high of July 13, 2007, VectorVest signaled a Confirmed Market Down. This one call alone saved VectorVest subscribers tens of thousands of dollars, paying for their VectorVest subscriptions for life. Since we keep track of every little move the market makes, we will never miss a big move. What more could you ask for?