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Is this any time for a market timing strategy?

There’s more than one way to time the market, says this U.S. advisory, and the best way is to be in at the right time of year.

The markets are going up! Against all odds, the National Football Conference won the Super Bowl. In the past, this has been a signal for a good year on the markets. Mind you, if the New York Giants, in addition to making miracle catches, could do something about the erosion of credit in the financial system, we’d feel a lot more confident about things.

But we’re not here to talk about indicators that have no rational explanation. We’re here to talk a market strategy that some investors feel is irrational… and others believe is the secret of success.

Is it a good idea to time the market in times like these? Is it a good idea to time the market even in the best of times? There are as many answers to these questions as there are individual investors.

Some people are never happier than when they are moving with the market, trading aggressively and living fairly close to the edge. Others would never get a wink of sleep if they even contemplated doing anything of the kind.

But there is more than one way to time the market. We get a glimpse of a market timing strategy that has little to do with buying or selling individual stocks. It comes to us from Mr. Sy Harding in his Street Smart Report.

Mr. Harding makes it clear that his basic approach is not built upon a short-term timing strategy that he “pops in and out of every few weeks when it goes against us.” It’s a carefully constructed strategy that’s built on the seasons.

A copyrighted strategy

Mr. Harding has a Seasonal Timing Strategy© that takes him in and out of the market in the fall and the spring. As you can see by the copyright, if someone else wants to develop a similar strategy, they’ll have to call it something else.

He also has a non-seasonal Market-Timing Strategy that supplies a sort of running commentary on what types of investments are worth considering at any given time. Right now, that strategy is “neutral on the stock market due to the short-term oversold condition.”

It does offer a few signals that might surprise some: a buy signal for bonds and the U.S. dollar, and a new sell signal for gold. It wouldn’t take a whole lot of digging to find other observers taking a completely opposite approach to these particular investments.

Mr. Harding’s strategies run on moving averages. Without getting deep into the technical details, a simple moving average tells you how a certain index or a specific investment is trading over a given length of time — 20 days or 20 weeks or whatever you choose. When it makes a significant break above or below its moving average, you should get a buy or sell signal.

This is admittedly oversimplified, and there are many variations that can be introduced, but we are not conducting a class on technical analysis, simply outlining what makes this particular market timer tick.

One investment only

Mr. Harding’s approach is simply predicated on being in the market when it historically makes most of its gains, and out of it when it is most likely to correct.

As a rule, he leaves the market in the spring (“sell in May and go away”) and returns sometime in mid-October. This year, his Seasonal Timing Strategy didn’t bring him back in until November 28! But you know what kind of a market it’s been.

Playing strictly by his own rules, the earliest Mr. Harding can exit the market this year is April 20, and it may be delayed as late as May or June. It may take that long to recoup after the poor performance of the markets in the early weeks of the year.

And when he does enter the market, he doesn’t do so with a portfolio stuffed with individual investments. He is 100 per cent invested in the Dow Jones Industrial Average Index, through an exchange-traded fund, Diamonds Trust, series 1 (AMEX-DIA). And that’s it. One investment only.

Occasionally, he adds, he has deviated from this approach, putting only 50 per cent of his holdings into the Dow Jones index, or switching into the S&P 500, for instance. And every time it has been a mistake!

When he has used his prime strategy, entering and exiting the Dow Jones index according to his signals, he has gained every year, sometimes as little as 0.6 per cent (in 2005), sometimes as high as 35 per cent, in 1999.

According to an accompanying chart, he has gained 140.2 per cent over the past nine years. So far this year, he is down 8.8 per cent.

A deeply oversold condition

Mr. Harding’s non-seasonal Market-Timing Strategy uses moving averages on the move, so to speak, to identify investments for the shorter term. This portfolio is not quite so single-minded.

It is 60 per cent invested at the moment “half the holdings defensive, and 40% in cash.” The portfolio has 20 per cent in bonds and 10 per cent in the U.S. dollar — “on both of which we had buy signals independent of the overall market.”

There is also 10 per cent in the health care sector and 10 per cent in Aegon (NYSE-AEG), the global life insurance company. Finally, there is 10 per cent in iShares S&P Global Financials Sector Index Fund (AMEX-IXG), “where we expected a good size rally off the deeply oversold condition, although realizing it would be a higher risk holding.”

The market’s sharp plunge did not deter Mr. Harding from his neutral position on the market. “A sell signal and short sales right now would also have some odds of running headlong into the Fed rushing in with an emergency rate cut, such as launched the market off its August lows to new highs.” And that is precisely what happened shortly after those lines were written.

He was, however, prepared to add a 10 per cent short sale of gold bullion.

Better than buy-and-hold?

Despite the occasional complaints of followers of his system who exited when the market was still going up, and vice versa, Mr. Harding asserts that his approach “has continued to work as a low-risk, market-beating strategy over the long term (and usually each individual year when compared to buy and hold).”

Nobody “buts in” with any suggested decisions, he adds, it’s all based on the buy and sell signals being sent out by the charts.

Obviously, these market-timing strategies are only for those who are willing to chart moving averages closely (or take the advice of someone who does). Our purpose is not to advocate or disparage this or any other strategy, but to look at the market from every possible angle.

At a time when many are looking for stability in their investments, is an approach dictated strictly by the market’s own movements better than a traditional buy-and-hold strategy? Is it better to sit on the sidelines for half of the year — or more — or to stay in the game all year long, ready to pounce on the best opportunities as they come along?

Do you want your hands free to make your own decisions, or do you want to follow an approach that takes the responsibility off your shoulders?

As always, it gets down to the preferences and personality of each investor. We will make one suggestion: we trust that whatever investment strategy you follow, it is based on something a little more substantial than the ability of one football team to outscore another football team by 3 points.