Stock market timing; some say it’s impossible, but others swear by it.
The reality is that it is not about predicting the exact top or bottom but about understanding market trends and adjusting your investing strategy accordingly.
Here’s Why Timing Matters
Have you ever heard the phrase, “Bulls make money, bears make money, but pigs get slaughtered”?
That’s because blindly holding stocks through market downturns can wipe out your gains.
In contrast, when you make informed decisions based on market trends, you can protect and grow your portfolio.
How to Read Market Trends
Three out of four stocks follow the major indexes. These stocks include Nasdaq, S&P 500, and Dow.
When the market is in an uptrend, your chances of picking winning stocks increase. But when it’s in a downturn, even strong stocks can take a hit.
Your goal is to track what’s happening, not guess what might happen. So, when there’s:
- An uptrend? Increase exposure to stocks.
- A market correction? Scale back and protect your gains.
- A market downtrend? Play defense and wait for recovery signals.
Market Timing Tools You Must Master
- Follow-Through Days. These are days when the market rallies on higher volume. Such days could signal the start of a new uptrend.
- Distribution Days. You’ll often find heavy selling by institutions on these days. That’s a warning sign that the trend might be shifting downward.
- Moving Averages. If stocks and indexes remain above key moving averages (like the 50-day line, you can assume that stock is strong; but if they are dropping below them, you might want to stay cautious.
Don’t Go All-In or All-Out
Instead of going all-in or all-out, adjust your market exposure based on market conditions.
Here’s what the five types of market exposure are telling you:
- 0-20% signals high caution. Our advice? Remain mostly on the sidelines.
- At 20-40%, the market is showing early signs of improvement.
- The market is building strength at 40-60%, which means quality stocks break out.
- At 60-80%, the market gains momentum and buying opportunities tend to increase.
- 80-100% reflects a full-blown bull market but don’t ignore warning signs of overheating.
