Can you time the market?

INVESTORS are consistently told it’s impossible to time the market. If we knew even remotely where “tops” and “bottoms” were, the market as we know it would cease to exist. Chartists will use technical trading methods and software to detect trends based on various factors – including momentum, volatility and turnover – to determine whether a share or index will make a new high or low.

Technical trading and market timing have been in the spotlight recently, with analysts at international technical trading firm Elliott Wave International predicting a massive stock market crash in the United States that will see indices losing as much as 90% of their value over the coming year.

Academics at the University of Stellenbosch Business School have tried to identify various models to see whether or not timing of the market is possible using the JSE All Share Index (Alsi) and cash as asset classes. “The results of this weekly study confirmed the findings of the international research: it’s possible to find mathematical models that can predict where to place your funds at any given point in time in order to outperform the stock market,” say Johan Keuler and Niel Krige from the university.

Keuler and Krige developed four different models they used for market timing, using a number of variables. According to their research, R100 000 left in cash over a 15-year period and allowed to compound delivered a 12,7% compound return, an investment in the Alsi delivered a 16,4% return and their best model delivered a 21,4% return after taking into account trading costs.

The USB team says: “This research clearly shows it’s possible to build a model that can outperform the stock market benchmarks by switching to cash before downturns and getting back into shares before upswings. While international studies have for some time now demonstrated strategies for outperforming their respective stock markets, the USB study illustrates that similar techniques can work in the South African context.”

While the USB model may boast superior returns against the Alsi, for most retail investors the ability to develop or execute a mathematical model of this nature is unlikely. The costs of buying technical trading systems of any nature also need to be taken into account when considering trying to “time the market”.

However, to put that performance in context it might make for interesting reading to look at the performance of some of SA’s more established managed unit trusts. While few have a track record of 15 years or longer, it makes for some interesting context:

* Allan Gray Equity Fund (annualised over 10 years): 23,6%

* Allan Gray Balanced Fund (annualised over 10 years): 20,6%

* Coronation Top 20 Fund (annualised since October 2000): 23,3%

Both firms are recognised as value investors with clearly defined investment strategies for stock selection.

As further context, an investor who had bought into JSE-listed investment holding company Remgro in 1975 would have enjoyed a return of 28,8%/year, including dividends per share growing at almost 18% since 1988.

Finweek’s conclusion: While market timing seems good in theory, investors who buy into sound long-term strategies with quality managers will still trump even the best mathematical models.