What is Market Timing in Investing?

Market timing may not be everything, but it is a big thing for short-term investors. Here’s why it’s such a big deal.

For long-term investors, who have the patience to watch the market move steadily up over the years, market timing may not matter. These investors might be fine buying stocks regardless of what’s going on in the market. Pullbacks and volatility are just part of having a stake in the market.

But market timing is a vital part of shorter term investing. It can help you determine when to buy or sell stocks to maximize your profits. The old, “buy-low, sell-high” strategy.

Our studies over the years have convinced us that you can make a great deal of money from a stock in its romance phase, before most investors realize the full thrust of the company’s story. If you wait for reality and a slew of fundamental facts (like growing earnings and a knockout of all competitors) to pour in, chances are you’re too late; the stock has already factored in the great news you’re now reading.

More importantly to investors, however, is if there is any way to see a downturn coming and avoid the pain? The answer is yes, and the method for avoiding devastating declines isn’t as complicated as the media makes it out to be.

Our Cabot Trend Lines is our most reliable (and simple) market timing indicator. It averages about one signal per year, though it can be far fewer. In fact, if you had theoretically bought the Nasdaq at every buy signal during the past 18 years and went to cash during sell signals, you’d have nearly doubled the Nasdaq’s return!

So you might wonder, what do our market timing indicators portend? Well, remember, they’re trend following measures, not trend predictors (to make big money you simply have to stay on the right side of the major trends).

Our market timing indicators won’t tell you what stocks to buy. Stock selection is an entirely different set of skills. But even if you have done all the research and found what looks like a perfect stock, you need to know what the market’s doing before you hit the BUY button on your online brokerage account.

To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons.