Our Technique

Like many of our competitors, our system is a trade secret.  Here we provide general information about the types of analytics commonly used, including market timing techniques.  After the general discussion, we provide limited details about our system and references if you are interested in learning more.

Investment analysis techniques are grouped into two categories:

Fundamental Analysis involves analyzing financial statements along with markets.  It can include analysis of the overall state of the economy, interest rates, earnings and management. 

Technical Analysis is an analytical discipline for forecasting future direction of prices by studying market data, primarily price and volume data.  This can include transformations such as moving averages, regressions and recognition of chart patterns.

Most mutual fund companies use these techniques to identify a mix of securities they think will outperform the rest of the market.  The basic sales pitch is the benefits of financial diversification versus owning just a few stocks, and their ability to identify the best stocks.  We agree that financial diversification is a sound strategy.  We also agree that Fundamental and Technical Analysis can successfully identify good investment opportunities.  Market timing uses these same methods.  Mutual funds do the analysis to decide when to sell certain stocks and buy others.  Market timers do the analysis to decide when to buy or sell the entire market.

There are 3 factors necessary for a market timing system to be successful, as identified by David Landis:

  1. A reliable signal to tell you when to get in and out of the market
  2. The ability to interpret the signal correctly
  3. The discipline to act on the signal

Items 1 and 2 are essentially the same thing – an understandable market timing system that works.  This is what we have developed.  Our process is automated to ensure consistency and avoid subjective errors. 

The 3rd point is the most important – the discipline to act.  To reap the rewards, you must be disciplined to check the market timing update after every trading session, and you have to act.  This is challenging because it is your money on the line, and no market timing system is perfect.  It can be difficult to trust it again and again when it occasionally produces a loss.  Credible market timing systems will produce better results over the long term.  Any company promising you can get rich quick should be carefully evaluated because promises of riches is a serious red flag.  We advise starting with a small dollar amount to become familiar with the market timing update and the process of placing trades with your broker.  As your comfort level increases, so can your investments.

Mr. Landis goes on to identify 3 kinds of market timing signals:

Yields & Valuations: Signals derived by comparing earning yields and the yields of short or long term Treasure securities.  This is a type of Fundamental Analysis.

Market Breadth: Analysis of market action over a short period of time, such as comparing advancing stocks versus declining stocks. This is a type of Technical Analysis.

Moving Average: This involves plotting a moving average on the same graph as the market index.  The signal to buy or sell occurs when the market index cross the trend line. This is also a type of Technical Analysis.

We primarily use a Market Breadth technique.  We identify patterns that reasonably predict turning points in the market, allowing us to forecast growth, decline and periods of uncertainty.  Some critics attempt to discredit market timing by stating that no one can forecast where the market will be in the future.  This is a deceptive statement.  Attempting to predict the market index at a future date is NOT market timing.  Market timing is about signals that identify turning points.  When signals occur, we do not know how much the market will grow or decline, nor how long the trend will last.

When the patterns signal growth, we incorporate an additional Modified Moving Average technique designed to act as a safety net against unexpected declines.  No signal is perfect at forecasting the market, so we have integrated this second method to minimize the loss when we’re wrong. 

References:

In the years spent developing our system we conducted our own analysis and studied multiple sources.  The following references outline foundational principles upon which we developed our methods:

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