- It's easier to beat the market when it's down than when it's up -
Call it the market- timing industry's dirty little secret: bear markets and heightened volatility are good for business.
That's not because they are ornery by nature. It's simply a rational recognition on their part that it's difficult to add value when the stock market is going straight up.
Take the U.S. market's extraordinary rise over the two years through its January top: It was achieved without even a 5% pullback in the S&P 500 much less the 10% drop that is considered the semi-official definition of a correction. Expected market volatility, as measured by the CBOE's Volatility Index fell to record lows.
Who needs a market timer during conditions like those? One leading stock-market timer I monitor told me that during the market's blow-off stage between last November and the late-January peak, he lost 18% of his subscribers. He added that he'd never before experienced a drop in subscribers of similar magnitude - much less over so short a period.
Glenn Neely, editor of the NeoWave market-timing service, said 2016 and 2017 were some of the most difficult he's experienced in a 30-year career.
Fari Hamzei, editor of the Hamzei Analytics advisory service, put it this way in an email: "At market highs, even your dog is a genius." But when the market declines and volatility spikes, which sooner or later is inevitable, then the skeptics "all run back to Papa with hat in hand." He said that he attracted subscribers "in droves" during the market's March-April volatility.
No wonder market timers secretly hope for a bear market.
This discussion goes to the heart of why our emotions are unreliable guides to investing. We have no interest in market timers just when we need them most, and then - after the market has declined and, in some senses, it's too late - we suddenly become interested. It's a classic case of closing the barn door after the horses have left.
A number of investment lessons can be drawn from this insight about how our psychology impacts our market timing, according to Hamzei:
Bottom line: Be realistic about what is reasonable to expect when you begin to time the market or subscribe to a market timing service. "No one can consistently get the tops and/or the bottoms right," Hamzei writes.
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email [email protected] .
From MarketWatch