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1.
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Definition
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Market
timing is the strategy of making buy or sell decisions of financial
assets (often stocks) by attempting to predict future market price
movements. The prediction may be based on an outlook of market or
economic conditions resulting from technical or fundamental
analysis. This is an investment strategy based on the outlook for an
aggregate market, rather than for a particular financial asset.
Other Resources:
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PCInvest.com:
Determination of when to buy or sell securities through
use of fundamental or technical indicators.
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Soundinvesting.org:
Market timing is the method of investing in certain asset
classes at certain times to improve your returns - particularly
stocks.
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Artrepreneur:
A method by which investors attempt to track various economic
indicators in hoping to purchase an investment and/or sell an
investment at the right moment which would yield the highest
return.
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Trader Soft:
Attempting to buy and sell securities to ride up trends
and avoid down trends in the stock, bond, currency, or commodity
markets.
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TIAA CREF:
A strategy based on buying or selling securities in anticipation
of changes in market or economic conditions.
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2.
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Examples, Types, or
Variations
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Types of market timing techniques:
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3.
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Formula
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4.
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Related Terms
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52
Week Low
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52
Week High
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Day
Trader
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Efficient Market Hypothesis
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Random Walk
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Technical Analysis
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Timing
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Trend
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Volume Data
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Economic Data
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5.
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As
Used in the Hedge Fund World
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Other Resources:
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Numeraire:
Market
timing is any attempt to use past prices and other
market-generated data to accurately forecast or prophesy future
prices of securities or indexes, whether long-term or intra-day,
consistently and persistently.
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Global Derivatives:
As
the name of the strategy suggests, this involves the appropriate
timing of the markets. This type of strategy often aims to
profit on the correct timing of investments across markets by
moving between various asset classes depending on the managers’
view on the market environment.
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6.
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Applications
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Several
independent organizations (e.g., Timer Digest and Hulbert financial
digest) have tracked some market timers' performance for in some
cases over thirty years. In many of these cases, they have found
that purported market timers do no better than chance or even worse.
However, some have proven to be reliable for the entire thirty year
period with performances that substantially exceed the performance
of the general stock market or the sectors that the market timer
invests in. Jim Simons Renaissance Technologies Medallion Hedge Fund
has consistently outperformed the market. The fund allegedly uses
mathematical models developed by Ellwyn Berlekamp. Efficient market
theory has also been criticized as an unscientific theory. That is,
it assumes the Null hypothesis is true (nothing can predict the
market), which is the reverse of standard Popperian methodology.
A recent study suggested that the best predictor for a fund to
consistently outperform the market was low expenses and low
turnover, not pursuing a value or contrarian strategy. However,
other studies have concluded that some simple strategies will
outperform the overall market. One market timing strategy is
referred to as Time Zone Arbitrage.
Other Resources:
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1st Choice Market Timing:
The basis for timing the stock market and mutual fund switching
derives from the fact that ideally one should be invested in the
stock market when prices are rising and out of (or short) the
stock market when prices are falling.
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Hedge Fund Association:
Market Timing allocates assets among different asset classes
depending on the manager’s view of the economic or market
outlook. Portfolio emphasis may swing widely between asset
classes.
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7.
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Misused & Abused
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Whether
market timing is ever a viable investment strategy is controversial.
Some may consider market timing to be a form of gambling based on
pure chance because they do not believe in the possibility of
predicting future financial prices. The efficient market theory
suggests that financial prices often exhibit random walk behavior
and thus can not be predicted with consistency. Some consider market
timing to be sensible in certain situations, such as an apparent
bubble. However, because the economy is a complex system that
contains many factors, even at times of significant market optimism
or pessimism, it often remains difficult, if not impossible, to
pre-determine the local maximum or minimum of future prices with any
precision; a so-called bubble can last for many years before prices
collapse. Likewise, a crash can persist for extended periods; stocks
that appear to be "cheap" at a glance can often become much cheaper
afterwards before either rebounding at some time in the future or
heading toward bankruptcy.
A major stumbling block for many market timers is the phenomenon of
curve fitting. This means that a given set of trading rules has been
optimized to fit the particular dataset for which it has been
back-tested. Unfortunately optimized trading rules often fail to
work on future data. Market timers attempt to avoid these
difficulties in a number of ways. One is by looking for clusters of
parameter values which work particularly well[1]. Another is using
out-of-sample data, which ostensibly allows the market timer to see
how the system will work on unforeseen data. However, critics charge
that once the strategy has been revised to reflect such data it is
no longer "out-of-sample".
Market
timing is not illegal, but a scandal erupted in the United States in
2003 where some mutual funds "secretly allowed select investors to
rapidly trade the portfolio despite statements banning the practice
in the prospectus. A double standard that favors one investor at the
expense of another is illegal and undermines the credibility of the
industry"[5] In this instance, the market timing frequently involved
predictions of the performance of how international markets would
respond to the day's trading in the US. This scandal also involved
late trading.
Other Resources:
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1st Choice Market Timing:
On the other side of the coin, there are also some disadvantages
to timing the market. First, unless you are timing the market in
a tax deferred vehicle such as an IRA, your gains will be
taxable in each year that you take profits and move out of the
market.
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About.com:
Market timing may be the two most dangerous words in investing,
especially when practiced by beginners.
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Greekshares.com:
It has become accepted wisdom in financial circles that
it is impossible to consistently "time the markets." This has
resulted partly from the theoretical academic arguments that no
one can have such an advantage (legally!) in their "efficient
markets."
More…
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8.
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Additional Sources of Information
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Books
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News
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Scholarly Papers
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