The consensus is that you absolutely can’t time the market. This common advice is based on a Warren Buffett quote that goes something like this: “Any attempts to pick the times to buy or sell, I think, are a mistake for 99% of the population. And I think that even attempts to pick individual securities is a mistake for people.”
I think his advice is spot on for anyone who is not interested in playing the investing game and wants to be assured a successful retirement. DCAing into low cost, broad based index funds works exactly as everyone thinks it does, and doing so ensures your long term success.
However, there are other ways such as using the 200 day or 40 week moving average.
What is the 200 day moving average?
Per Investopedia: The 200-day moving average is considered a key indicator by traders and market analysts for determining overall long-term market trends.
Consider the 200 dma a visual representation of the average price’s movement. If it is moving higher, that means that the average price today is greater than the average price 200 days ago (trending up). If it’s moving lower, then the current average price is less than it was 200 days ago (trending down).
How do institutions, hedge funds, and traders use the 200 dma?
Per Paul Tudor Jones: “I look at the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: ‘How do I keep from losing everything?’ If you use the 200-day moving average rule, then you get out. You play defense, and you get out.”
How to use the 200 dma: The trend is your friend
The stock market is always moving up, down, or sideways. No one can predict what direction it will turn at any time. As bad as things look right now (war, energy prices, inflation, dumb dumb Fed, etc.), the market could turn upwards tomorrow and start the biggest bull run in history. All we can do is recognize which way it is heading RIGHT NOW and adjust accordingly.
What is a Trend?
Per Investopedia: An uptrend is a series of higher swing highs and higher swing lows. A downtrend is a series of lower swing highs and lower swing lows.
Case Study: the 2000 Bear Market
Exit Criteria: Price must close below a declining or flat 200 day or 40 week moving average, then start a new downtrend by closing below the previous swing low. This eliminates false signals where the price dips below then back above the ma.
Entry criteria: Price must close above the rising or flat 200 day or 40 week moving average, then start a new uptrend by closing above the previous swing high.
Getting Out
• Red Flag #1: Price dipped or closed below a rising 40 week ma several times starting in September ’99. Price chopped up and down for 1 year until the 40 week ma flattened in Sept ’00.
• Red Flag #2: Price closed below a slightly declining 40 week ma the week of 9/24/00
• Exit Signal: The very next week price closed below the previous swing low (week of 7/23/00). This was your signal to exit at $143.62.
The market then steadily declined for the next 2.5 years, including 8 bear market rallies. Price closed above the 40 week ma 2 times during the downtrend, but the MA never turned upward and a new trend never started above it.
Getting In
• The market bottomed during the week of 10/6/2002, but none of us would have known that at the time. Price finally closed above the flattened 40 week of 4/13/2003, but below the previous swing high 1 week earlier.
• 2 weeks later the price closed above the previous swing high at 93.21, and above a slightly rising 40 week ma.
Results
Out of market: 10/1/200 at $143.62
Back into market: 5/4/2003 at $93.21
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