Time For Market Timers To Get Some Respect?Jeffrey M. Laderman
Market timers, the soothsayers and traders who jump in and out of the stock market, are among the most unloved sorts on Wall Street. Their raison d'tre--riding the uptrends, dodging the down moves-- flies in the face of the conventional wisdom that stocks should be held for the long term. Perhaps only the short-sellers, who make their money on falling stock prices, are more despised by the investment Establishment.
But so far, 1994 is one of those years for timers to strut. In the first half, timers produced an average return of 0.1%, according to the Hulbert Financial Digest newsletter that tracks their advice. That may not sound like much, but during the same period the Wilshire 5000 Value-Weighted Total Return Index, a broad measure of stock-market performance, was down 4.5% (table) and the Standard & Poor's 500-stock index fell 3.6%.
And many of the best-known market-timing newsletters did a lot better than 0.1%. The Elves Short-Term model, one of several in Bob Nurock's Advisory, scored a nifty 3.2% return. Nurock told subscribers via his telephone hotline to switch from stocks to cash on Feb. 15--two weeks after the Dow Jones industrial average reached an all-time high. Nurock is still bearish. With the market continuing to struggle, investors are starting to wonder if the timers' in-and-out strategy is a better way to go.
The extent of market-timing is anybody's guess. Douglas Fabian, editor of Fabian's Investment Resource, one of the largest of some 130 timing newsletters, says it has 36,000 subscribers with an average portfolio of $138,000. That alone is nearly $5 billion. Fabian and other gurus also manage money for individual and small corporate pension plans. Most timing is done in tax-deferred accounts.
INVESTOR NON GRATA. Usually, timers don't focus on individual stocks. No-load funds, with their easy switching privileges, are their favorites. Because they may dart in and out of a fund quickly, timers can force some fund managers to sell stock to meet redemptions. Some fund companies have booted frequent switchers out.
Most timers use "technical" systems to call the shots. They analyze stock-price movements and volume changes to decide whether to buy or sell. Some add monetary indicators such as interest rates and take fundamentals such as p-e ratios into account. Depending how the triggers are set and how volatile the market is, timers may signal as few as two or perhaps a dozen switches a year.
But while most of the newsletters are bearish right now, not all called the downturn as well as Nurock. Many stepped to the sidelines during 1993, and Joseph Granville urged his followers out of the market nearly two years before the stock market peak. Fabian's Investment Resource said sell on Mar. 31. On the next trading day, Apr. 4, the Dow hit its low so far for the year.
"Sure, I worry that we sold at this year's bottom," says Fabian, whose letter was known as Telephone Switch Newsletter from the time his father launched it in 1977 until last year. "But we also came out 7% below the all-time high on our mutual-fund composite--and that's not bad." While Fabian's logged the lowest 1994 returns of eight well-known timing letters, its long-term results are competitive with its rivals.
But are market timers competitive with buy-and-hold investors? Over the last three and five years, the timers have, for the most part, come up short. Those systems that sold stocks short instead of merely moving to cash did the worst. Of 75 newsletter timing systems with five-year track records, only 15 beat the Wilshire index. For the 10-year period, just 2 of 21 beat the index.
One reason that timing often falls short is that the stock market usually makes its big moves in short, sharp bursts. The penalty for missing those moves can be high, says Martha E. Ortiz, a partner in the Philadelphia investment firm of Aronson & Fogler. Ortiz notes that from April, 1970, to April, 1994, the S&P 500 had an 8.1% average annual price gain. But if the timer missed the five days with the largest gains, the return drops to 6.9%. True, a timer that dodged the worst five days would have beat buy-and-hold returns. But, says Ortiz, since the market goes up two-thirds of the time, there's more to be lost from missing the up moves than gained from avoiding the down.
FALL GUYS. Timers admit their services haven't looked so hot in recent years. The stock market was generally bullish, and bear markets were sharp but short. Investors who bought at the market top in 1990 recouped by early 1991. Even after the 1987 crash, the averages rebounded within two years. Timers point to the painful bear markets of the 1960s and 1970s to make the case for timing.
Timers argue that simple comparison to the stock-market averages is no way to measure their worth. "Because a timer goes to cash, he incurs less risk over a market cycle," says newsletter editor Hulbert. "If he reduces risk more than he gives up in returns, then he's adding value." Over the last five years, about one-third of the timers did just that.
Even if an investor doesn't dance to the market timers' tunes, their advice can be useful. Jim Schmidt, editor of Timer Digest, says about half of his readers are large money managers who don't switch in and out of the market. "But if they get some new money in and the timers they respect are bearish," he says, "they just may delay investing it." In a world so biased to the buy-and-hold philosophy, a different voice may be worth hearing.
HOW THE BIG-NAME MARKET TIMERS FARED Cumulative returns through June 30, 1994 Newsletter/ Six Three Five Timing system months years years THE BIG PICTURE Master Key, no shorting 1.8% 17.7% 64.7% BOB NUROCK'S ADVISORY Elves Short-Term, no shorting 3.2 47.0 62.0 ELLIOTT WAVE THEORIST 100% cash on sells 1.8 9.6 20.2 FABIAN'S INVESTMENT RESOURCE Equity/Cash Timing Model -2.7 32.4 57.9 GRANVILLE MARKET LETTER 100% cash on sell signals 1.8 22.7 70.1 INVESTECH MUTUAL FUND ADVISER Mutual Fund Timing Model 0.9 27.3 56.8 PROFESSIONAL TIMING SERVICE Supply-Demand, no shorting -1.0 32.6 102.1 SYSTEMS & FORECASTS Time Trend, no shorting 0.1 26.6 68.7 WILSHIRE 5000 VALUE-WEIGHTED TOTAL RETURN INDEX -4.5 33.9 61.6 NEWSLETTER TIMERS' AVERAGE* 0.1 17.5 34.5 *108 timing systems for six months, 95 for three years, 75 for five years DATA: HULBERT FINANCIAL DIGEST