Outside the Flags: October Fest – Timing Still Doesn’t Work

This is an interesting piece by Jim Parker – giving yet one more example that timing systems don’t work and that experts aren’t expert.

Steve

Ever noticed how gamblers always tell you about their big wins, but tend to keep their even bigger losses close to their chests? People who seek to finesse their entry and exit of financial markets are similar.

Going awfully quiet in recent days have been the analysts who a month ago were saying that that was the time to get out of risk assets. It seemed a good call at the time as global stock markets had suffered their worst quarter in nearly three years.

Pummelling confidence were a host of concerns, including the European sovereign debt crisis, signs that global growth was stalling and a general lack of confidence in policymakers to take effective action to avoid another recession.

One chartist quoted by Dow Jones1 said the US market was breaking down in what could be a very nasty prelude to the fourth quarter. The advice from the technical analysts was that investors needed to be extremely wary buying stocks in October.

Adding to the nerves were the now routine reminders2 to investors about October supposedly being the “scariest” month for shares, with two of the biggest crashes in history occurring in the 10th month of the year–in 1929 and 1987.

Now while further volatility may well still lay ahead, those who took that advice and bailed out of risky assets at the end of September might now be ruing their decision.

The US S&P-500 rose by nearly 11 per cent in October, its largest monthly rise since 1991.3 That was the year that dance act ‘C&C Music Factory’ was topping the pop charts and ‘The Silence of the Lambs’ won Best Picture at the Academy Awards.

But it wasn’t just a US story. The MSCI All-Country World Index rose by 10 per cent in October in US dollar terms, its largest one-month rally since April, 2009. In Australia, the S&P/ASX-200 gained 7.2 per cent in local currency terms, its best one-month performance since July, 2009. What’s more, among the biggest gaining sectors in October were financials, energy and materials sectors, which had all lagged in the defensive mood of the prior months.

These are significant upward movements and will have eased some pain for investors after five-to-six months of consecutive decline in equity markets, but not if you had listened to the advice of some of the Jeremiahs in the financial media.

It’s not often appreciated by ordinary investors that markets are forward looking. We know the news has been bad, but it’s what comes next that counts. Selling out after a bad run in the markets just means you turn paper losses into real ones and leave yourself with the extremely difficult challenge of finessing your re-entry point. The reversal of direction in October highlights this difficulty.

We don’t know if these October gains are sustainable — and already in November, sentiment around Europe has turned sour again. But we do know that markets can move quickly and respond to new information instantaneously. That’s why market timing is so hard and why the best approach is to maintain your chosen asset allocation–with periodic rebalancing–irrespective of the week-to-week and month-to-month noise.

1.’MARKET TALK: Use Extreme Caution Buying Stocks’ — Dow Jones Newswires, Sept 24, 2011

2.’Share Jitters Deny US Rise’, Daily Telegraph, Sydney, Sept 26, 2011

3.’US Stocks Decline Amid Concern About European Funding’, Bloomberg, Oct 31, 2011