The term “market timing” has had a bad connotation ever since New York Attorney General Eliot Spitzer used the term incorrectly to describe illegal after-hours trades that enriched institutional traders and cost mutual fund shareholders millions. Market timing is a strategy of investing during market uptrends and reverting to cash, or other alternatives, during market downtrends. Market timers do not subscribe to the buy-and-hold philosophy, where the investor is in the market 100% of the time. Investors utilizing market timing may be out of the market for months or years in an effort to eliminate losses.
Weir notes a change in the slope of the yield curve provides a one-year advance forecast of the economy. She points out the S&P 500 index responds to the change in the curve in a matter of days. A change to an inverted yield curve is a sell signal, a change to a normal or positive yield curve is a buy signal. Moreover, Weir pinpoints the specific buy and sell dates by incorporating three values in her analysis: changes in the maturity and quality of spreads, the price of 10-year notes and the rate of change in fed funds.
Weir uses technical analysis tools to further confirm her yield curve signals. These include negative breadth of the Dow Jones Industrial Average (for example, a buy signal is generated when all 30 issues are down on same day), the Volatility Index (VIX), the put/call ratio and an MACD on the last two indicators. She uses the 12- and 26-day moving averages on the VIX and the put/call ratio and looks for a cross up for a buy signal or a cross down for a sell signal.
Weir includes four chapters on “cultural indicators.” These include a chapter on changing feminine beauty, highlighting the relationship of stock prices to Playboy magazine centerfold body measurements. Elsewhere, she covers demographics, such as birth and death rates, marriage and divorce rates and crime rates, which she uses as coincident market indicators. She rounds out the book with chapters on corporate spending, war and rumors of war and their impact on stocks. While interesting, these factors do not appear to add much value to timing the market.
Market timing is a viable approach to trading. Weir’s major contribution of using yield curve analysis coupled with technical indicators is a novel approach that investors should consider adding to their arsenal. The pundits and so-called market gurus who consider market timing futile should read this book. Perhaps they will see that market timing is a viable investment approach.
Leslie N. Masonson is president of Cash Management Resources, a financial consulting firm. E-mail: lesmason@frontiernet.net.
