Trend Following Beats Market Timing!

Trend following is one of the important parts of our playbook.  We derive much of how we follow trends by our analysis of money flows.  Thus I was interested in this column put out by the folks over at Dorsey, Wright.  Excerpt, my highlights:

Mark Hulbert has been tracking advisory newsletters for more than 20 years. Lots of these newsletters are active market timers, so in a recent column, he asked an obvious question:  The first question: How many stock market timers, of the several hundred monitored by the Hulbert Financial Digest, called the bottom of the bear market a year ago? And a follow-up: Of those that did, how many also called the top of the bull market in March 2000 — or, for that matter, the major market turning points in October 2002 and October 2007?......Although there are pundits who claim to have called the bottom to the day, Mr. Hulbert allowed a far more generous window for labeling a market timing call as correct.

… {Hulbert's} analysis actually relied on a far more relaxed definition: Instead of moving 100% from cash to stocks in the case of a bottom, or 100% the other way in the case of a top, {he} allowed exposure changes of just ten percentage points to qualify.  Furthermore, rather than requiring the change in exposure to occur on the exact day of the market’s top or bottom, {he} looked at a month-long trading window that began before the market’s juncture and extending a couple of weeks thereafter.

That’s a pretty liberal definition: the market timer gets a four-week window and only has to change allocations by 10% to be considered to have “called” the turn. And here’s the bottom line:  Even with these relaxed criteria, however, none of the market timers that the Hulbert Financial Digest has tracked over the last decade were able to call the market tops and bottoms since March 2000.

Yep, zero.....It’s not that advisors aren’t trying; it’s just that no one can do it successfully, even with a one-month window and a very modest change in allocations. Obviously, there is lots of hindsight bias going on where advisors claim to have detected market turning points, but when Mr. Hulbert goes back to look at the actual newsletters, not one got it right!....

Link:  Trend following beats market timing!

Like the fellows at Dorsey, Wright (who by-the-way gave us some of our first lessons in money flow analysis) I don't know where the market will be on a going forward basis.  We can us money flow analysis to give us a list of criteria and probabilities.  From these lists we have developed the playbook and from that we build our current game plan.  We do however also try to follow trends as they present themselves  and try to stay with that for as long as possible.