STOCK MARKET TIMING

PHILOSOPHY

Stock market timing is a major way that we add value to our clients' portfolios. Academic studies and common sense show that asset allocation is the most important decision that an investor can make. We aim to match or exceed the market returns during bull markets and significantly outperform the market during bear markets.


Studies have shown that proper stock market timing will typically outperform no market timing on a risk adjusted basis but not on an outright gross basis. We leave it to each client to determine their tolerance for risk and instruct us as to the strategy they prefer. Risk tolerant clients will generally prefer to forego stock market timing and look to make extra returns over the long run. Risk averse clients will generally prefer to use stock market timing to protect against significant equity drawdowns while still participating in most of the gains of bull markets.

STOCK MARKET INDICATORS

We do this through the exhaustive study of stock market timing indicators. These include the major factors that affect the market, such as:
· The economy · Monetary policy and interest rates · Valuation · Market breadth · Stock Market trends · Sentiment


We have identified about three dozen key indicators that have had a persistent and powerful influence on the market through this century. We have discovered this through statistical studies of the impact of each of the indicators on the stock market. The individual market indicators are tested for reliability and strength. Several hundred indicators were tested over this century and especially since World War II before selecting the most powerful indicators that we use today.


This testing process is never finished. We are constantly monitoring the veracity of our current market indicators and look for better ones. Please see our chapter from the recent book Fundamental Analysis (Jack Schwager, John Wiley & Sons, 1995). This gives a good idea of the type of market indicators that we use.

ASSET ALLOCATION

The Courtney Smith & Co. Approach is to use a two step process to determine the asset allocation.


The first step is to create a diffusion index of the stock market indicators discussed above. A diffusion index simply adds up the percentage of the indicators that are bullish. For example, if seven of the ten indicators are bullish then our base allocation is 70% long the market. As another example, if five of the ten indicators are bullish then we would only recommend being 50% long the market with the balance of the account in cash or fixed income securities.


The second step is to make minor adjustments to the base asset allocation. We do this to account for special circumstances that are not considered in the indicators that we use for asset allocation. For example, the effect of changes in the tax code are not considered because they happen irregularly. We allow a deviation from the asset allocation model of 10% on either side of the suggested allocation depending on the qualitative judgment of the Chief Investment Officer.


This two step process then gives a final asset allocation to the stock market. We invest primarily in the stock market because studies have shown that long term investment in the stock market will outperform fixed income investing. We therefore wish to have the odds in our favor.


The balance of the account is then invested in some type of fixed income. The length of the maturity of the fixed income is determined by the same process as the asset allocation of the stock portion of the account. Courtney Smith & Co has developed a model for investing in the bond market. We invest the balance in bonds when the model is bullish and invest it in money market instruments when the model is bearish.

THE BOTTOM LINE

We believe that the Courtney Smith & Co. Stock Market Timing Approach is disciplined and rigorous. At the same time, there is enough flexibility to account for sudden stock market movements. As a result, we believe that it presents superior performance with controlled risk.

Go to Stock Selection




CONTACT