What About Short Term Market Timing?

As we review some basic approaches to managing your portfolio risk, we have been covering basic market timing. Now, I often get questions about different market timing systems that are offered by different advisory services, and the possibility of incorporating them into our systems. Last time we described a system doing just that with the Timing Cube, combining it with our ETF rankings to result in a system that outperformed either one alone when backtested.

But there are several other systems being advertised, and many of them have a common characteristic. Their goal is to simply trade the major market averages, paying no attention to equity or fund selection, and simply trying to time the highs and lows of the general market. Almost all of these trade fairly frequently, making it impossible to utilize the majority of mutual funds for these systems.

Short Term Market Timing

They are generally traded using either ETF funds that track the market (the runaway favorite is the QQQQ, which tracked the Nasdaq), or it's proxy, which are the leveraged funds offered by fund families like Profunds or Rydex, which can be traded on a daily basis. They often utilize the both the long and short leveraged version of these funds (typically the leveraged versions are set up such that the daily percentage change is either 100 to 250% or -100 to -250% of the index they are trying to mirror).

Swing Trading

Some systems (e.g. Timing Cube) try to limit their trades to just a handful of trades a year, while others are in and out every few days. This short term in and out trading is generally referred to as swing trading. More on swing trading can be found at

http://en.wikipedia.org/wiki/Swing_trading

Now in my mind, this frequent trading crosses the boundary from investing to speculating. That doesn't necessarily make it bad, but it is quite difficult to do well over a long period of time, and it ends up taking more of your time to manage these trades (I know of one system that will email you or post notices on their web page each market day between 3:30 and 4:00 Eastern time, just before the market closes). That's like being chained to the computer.

The advisory services that engage in swing trading are not generally tracked by by ratings services like the Hulbert Digest, although the Timers Digest does track a few of them

One that's been around for a while that seems to have a reasonably good track record is Timing Signals.

http://fundztrader.com/timingsignals

I can't really recommend sinking a lot of money into these swing systems, as they can be fairly speculative. But, they do have one thing going for them. Even if they don't have returns that are much higher than the rest of your portfolio, because of the frequent trading this part of your portfolio will have a low correlation to the other parts of your portfolio.

And THAT will become important as we move into the second technique to reduce your portfolio risk: Diversification.

Next time: We will look at diversification, how does it work, and why the conventional wisdom sometimes fails to produce a truly diversified portfolio.