Was it time to be in equities on 3/31/2003? Check out the following data table and make a decision. Remember, we are about a year removed from the market low.
Knowing what moves to make looking back on specific market inflection points is not all that difficult. But what moves should an investor make months or even quarters after the turning point is much more difficult. The above analysis begins to give us clues as to what TAA to employ depending on the values of Delta.
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ITA Wealth Management readers may want to know what is behind all the recent analysis entries. While there are many academic articles that argue the futility of market timing, we just lost a decade of investing even though money was to made during this miserable period. Buy & Hold did not work very well over the last nine to ten years. Can we do better? That is the fundamental question behind this research.
The first step in the analysis process is to isolate most of the maximum and minimum points for the S&P 500 over the last nine to ten years. It is almost sounding like differential calculus-but not quite that difficult. Using rolling three-year periods, I am calculating the difference between the historical three-year performance and a projected future annualized return. The difference between the Future value and Historical value is what I call Delta. You see these headings in the associated tables.
When the S&P 500 hit a maximum point, the Delta values turned red, giving the signal it was time to be out of the stock market and into cash or some conservative equivalent. When the market hit a low or minimum point, the Delta values turned green, giving signals to be in the market. The market direction was quite clear going back over those critical maximum and minimum points. The more important question to ask is the following. What is the analysis telling us as we move away from the critical maximum and minimum points? What percentage clues do we look for from the Delta calculations in order to make intelligent Tactical Asset Allocation moves?
It is quite clear to me that I want to be out of the stock or ETF when the Delta calculation comes up negative, or even red. But what if the Delta value exceeds 10% or 12%? Is that the time to increase holdings in those ETFs? The goal is not to time the market by attempting to pick market tops and bottoms. Rather, the goal is to minimize losses and maximize gains, even if one can prevent losses by as much as 10% and capture an additional 10% gain to the upside. Does the Delta calculation direct us to be in the market when the slope is positive, and get us out of the market when the slope turns negative? That is the burning question.
Lowell Herr
Photograph: Crystal Springs Rhododendron Test Gardens – Portland, OR
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