Introduction

What is MarketTiming?

MarketTiming is a financial advisory service that issues share market trading signals designed to help you ride bull markets and minimise your exposure to bear markets. It has operated since 2009.

Our clients are investors who don’t want the roller coaster ride that comes with buying and holding a portfolio of shares regardless of market conditions.

Specifically, we provide our clients with ‘Buy‘ and ‘Sell‘ signals for trading exchange traded funds (ETFs) with a view to letting profits run, but cutting losses short.

An ETF is a trust fund listed on the Australian Securities Exchange that invests in a portfolio of tradeable assets (such as shares) that often mirrors a well-known stock market index (such as the SPDR/ASX 200 share index).

For an explanation of ETFs visit and read the ASIC Moneysmart webpage.

The material on MarketTiming’s website is general advice only and does not take into account your personal financial circumstances, needs or objectives. Before acting on this information, you should consider whether the advice is suitable for you and your personal circumstances. You should also read the Financial Services Guide for MarketTiming before deciding to use any of its ETF trading strategies and inspect the Product Disclosure Statement for any ETF recommended by MarketTiming for applying its strategy trading signals. MarketTiming’s FSG is published on this website while the PDS for each ETF is published on the website of the ETF provider.


How MarketTiming Works

Our trading signals are not based on guesswork or forecasts, but on objective measures of the direction of a market sector represented by an ETF. This could be the Australian stock market as a whole (e.g. the Australian All Ords index) or a particular segment of a local or global market (e.g. the Australian finance sector or internationally the emerging markets sector).

We don’t try to pick the top or bottom of a market’s cycle. Instead we measure a market’s long term trend and momentum to confirm when it has troughed and when it has peaked. If the market whipsaws (i.e. suddenly reverses direction after establishing a new trend) we change signal so as to limit any loss or opportunity cost. The overriding priority is to grow and preserve capital through ridding rallies and abandoning busts.

MarketTiming’s trend-following approach to generating Buy and Sell signals for an Exchange Traded Fund

The best way to reduce emotions and subjectivity from the share investing process is to use a fully mechanical strategy signalling service like MarketTiming’s. Otherwise an investor can become a victim of the cycle of emotions; buying towards the top and selling towards the bottom of a share market cycle, which is wealth destroying.

 

Source: http://www.tradingacademy.com/lessons/article/the-psychological-cycles-of-trading-and-investing/

By using trend lines and a momentum oscillator a good market timing system can avoid most of the pain of a market crash like that which occurred during the 2008 global financial crisis by exiting the market early after it has peaked and re-entering it early after it has troughed. See next chart.

An illustration of a how a market timing system would have avoided most of the Australian share market meltdown of Oct 2007 to Mar 2009.

Source: www.MarketTiming.com.au using www.incrediblecharts.com.au

 

A market timing system can also use relative strength momentum indicators to identify which market sector funds are worth backing and which to avoid as shown in the next chart.

Source: www.MarketTiming.com.au using www.incrediblecharts.com.au

 

Diligently applying the signals and strategies of our computerised timing system should help avoid much of the downside of a market contraction while gaining much of the upside of a market expansion. But it requires self-discipline to succeed and a willingness to accept occasional losses (because no market timing system is perfect) so as to win over the longer-term.


Our ETF Trading Strategies

We publish market signals for three ETF trading strategies, each of which involve a different number of expected signal changes per year and different risk and return characteristics. These strategies are:

Conservative Strategy

  • This strategy trend-trades the general Australian share market as represented by the All Ords share index with the objective of riding rallies and sidestepping crashes. It generates an average of one signal change per year for an Australian equity ETF;

Rotation Strategies

  • The Local ETF Rotation Strategy covers three local share sectors (finance, property and resources) and backs the one with the strongest price momentum. This strategy generates about three ETF switches a year.
  • The Global ETF Rotation Strategy covers three global share markets (USA, other developed markets and emerging markets) and recommends the one with the strongest price momentum. It also generates about three ETF switches a year.

Conservative Strategy

This strategy trend-trades general equity ETFs – that move in step with the All Ords share index – in order to ride booms and abort busts on the Australian stock market.

The Conservative strategy gauges the underlying price trend of the Australian All Ordinaries index’s so as to navigate its long term price cycles.

This strategy averages about one signal change a year though its frequency varies. It uses the SPDR S&P/ASX 200 share fund ETF (ASX code STW) for timing the Australian share market, though it is possible to use alternative ETFs such as:

  • Vanguard’s Australian Shares Index ETF (ASX code VAS) which invests in the top 300,
  • iShares MSCI Australia 200 Fund (IOZ) which invests in the top 200,
  • State Street Global Advisors SPDR S&P/ ASX 50 Fund (ASX code SFY) which invests in the top 50 listed companies,
  • BetaShares FTSE RAFI Australia 200 Fund (QOZ) which invests in a ‘fundamentally weighted’ index of shares, and
  • VanEck Vectors Australian Equal Weight ETF (MVW) which invests in an equally weighted index of over 60 of the largest listed companies.

The Conservative strategy can also be applied to high dividend ETFs such as Vanguard’s VHY, SPDR’s SYI and Russell’s RDV and listed investment companies such as Mirrabooka Investment Ltd (ASX code MIR), Australian Foundation Investment Company (AFI), Milton Corporation Ltd (MLT) and BKI Investment Company (BKI), whose share portfolios are representative of the Australian stock market.

 How the Conservative Strategy Works

The Conservative strategy works on the basis that the share market’s trend is our friend until it bends and when investing in an ETF to let profits run and cut losses short.

The Conservative strategy aims to stay on the right side of the All Ords long term trend line. A good analogy is a ship’s Plimsoll line, which is a reference mark located on its hull that indicates the maximum depth to which the vessel may be safely immersed when loaded with cargo. As long as the ship floats above that line it is safe to be on-board, but if it sinks below that line it is not.

Likewise when the All Ords share index stays above its long term trend line MarketTiming recommends holding a listed equity fund, but when the share index falls below that trend line it recommends exiting the share market and holding cash.

Using the Conservative Strategy

When the Australian share market is attractive we issue a ‘Buy’ signal in MarketTiming’s Weekly Update bulletin issued to subscribers each Sunday and in the “Our Signals” section of this website. Interested investors then buy units in a general Australian equity fund listed on the Australian Securities Exchange (such as those listed above) using an online trading platform offered by a discount stockbroker such as CRM Markets, E-Trade or Commsec.

When it’s not safe to be in shares, we issue a ‘Sell’ signal so that investors can divert their capital from shares to a cash management account where it is sheltered from stock market contractions. Online share trading accounts usually offer a linked cash management account.


Rotation Strategies

We offer separate Local and Global ETF Rotation strategies. Interested investors may use both or only one. The Local Rotation strategy focuses on three local industry sector ETFs (finance, resources and property) and the Global Rotation strategy uses three regional market ETFs (USA, other developed countries and emerging economies). Each rotation strategy also uses Gold and Cash as defensive assets during bear markets.

On average each Rotation strategy rotates (i.e. switches) its preferred ETF about three times a year (or around once every four months). In practice the frequency of such switches may vary from this average.

These strategies use the weighted relative price increases of the different ETF’s over a suitable time frame to decide which ETFs exhibit the strongest price momentum. It then backs the winning local ETF and global ETF in market rallies or retreats to cash or gold in market corrections.

There are eight funds we time within MarketTiming’s Global and Local ETF Rotation strategies. Six are used for equity bull markets (three Global regional market share funds and three Local industry sector share funds) while two are used in equity bear markets (gold and cash funds). The ASX codes for each ETF (other than CASH) are shown in parentheses.

Global Regional Market Share Funds

  • USA Shares: iShares Core S&P 500 Fund (IVV)
  • Other Developed Market Shares: iShares MSCI EAFE Fund (IEU)
  • Emerging Market Shares: iShares MSCI Emerging Markets Fund (IEM)

Australian Industry Sector Share Funds

  • Australian Finance Shares (ex-Property): SPDR S&P/ASX 200 Fin (ex-Prop) Fund (OZF)
  • Australian Resources Shares: BetaShares S&P/ASX 200 Res Fund (QRE)
  • Australian Listed Property Trusts: SPDR S&P/ASX 200 Listed Property Fund (SLF)

Bear Market Refuge Funds

  • A Bank Cash Management Account (CASH).
  • ETFS Physical Gold Fund (GOLD)

ETF Providers

To obtain Product Disclosure Statements and Provider Factsheets on each of the ETFs mentioned above visit the home pages of the providers of these products, namely:

 

How the Rotation Strategies Work

The beauty of the first six funds is that in a bull market at least two of them should be rallying and hence ideal candidates for holding based on their relative positive price momentum. The gold fund is used for profiting in bear markets (since gold normally rallies in a share crash) and the cash fund is used if none of the other funds exhibits positive price momentum.

Think of a Rotation strategy as a diverse asset class race where investors always back the Global ETF doing best and/or the Local ETF doing best or in a share market crisis (like 2008) use a gold or cash fund for protection. Its construction makes an ETF Rotation strategy particularly suited for share markets exhibiting strong and sustained positive or negative price momentum. Sideways meandering markets work least well for a Rotation strategy because long term price momentum slows. 

Using the Rotation Strategies

We use a momentum measuring model to time each ETF on a weekly basis. We then list the best performing Global and Local ETFs in our Weekly Update bulletin as Buys and signal any changes to them as Sells. When commencing a Rotation strategy, equal amounts of capital should be used to buy each ETF. At the end of each financial year the Rotation Strategy’s portfolio can be rebalanced so that its two ETFs are equalised in value.


Advantages of ETFs

Equity exchange traded funds (ETFs) listed on the Australian Securities Exchange (ASX) are a simple and inexpensive way to gain a diversified stake in the top 50, 200 or 300 companies listed on the ASX or on other stock exchanges around the world (e.g. USA, Europe, Japan, Emerging Markets) thereby minimising specific risk exposure to any one company.

Because ETFs have very liquid markets, units in such trust funds can be bought or sold quickly like ordinary shares through any stockbroker either by phone or online. They also have low annual management expense ratios (MERs), normally of less than 0.3% per annum. They are also transparent (portfolio information is available daily online) and tax compliant (e.g. eligible for self-managed super funds). For these reasons they are the preferred class of investment vehicle for market timing.

ETFs are less risky than many other asset classes because they allow for a broad diversification of stocks and bonds at a fraction of the cost. However, they are not without risks. For a summary of these visit http://etfdb.com/etf-education/hidden-risks-costs-etfs/

Further information about ETFs is provided by the Australian Securities Exchange (ASX) which lists these products for trading (see http://www.asx.com.au/products/etf-and-other-etp.htm).


MarketTiming Trading Signals

A MarketTiming strategy signal takes one of two forms:

  • A ‘Buy’ signal flags when to buy a specific fund listed on the Australian Securities Exchange (ASX); and
  • A ‘Sell’ signal flags when to sell such a fund and transfer the sales proceeds to a safe cash management account linked to a stock broking account.

MarketTiming monitors whether a change in trading signal has been triggered on a weekly basis, and all subscribers to The Constant Investor are informed of such in a MarketTiming Weekly Update bulletin emailed each Sunday unless they have opted out of this service. Any signal changes are also posted on the “Our Signals” section of this website.

Often trading signals do not change for many months because our trading strategies are based on long term market trends and momenta, not short term fluctuations. Our trend and momentum trading models monitor big market waves, not small market ripples.

We believe that aggressive trading which attempts to catch intra or inter-day market moves is risky and wealth destroying for most who engage in it (see http://www.thecrosshairstrader.com/2011/10/warning-aggressive-trading-can-be-dangerous/). Our aim is to capture upside potential and protect downside risk by focusing on the market’s big picture moves. That means slow not fast trading, which explains why we label our core MarketTiming strategy, “Conservative”.

How to Begin with MarketTiming’s Signals

For the Conservative Share Strategy (around one signal change a year), we would suggest that an existing Buy signal be phased in slowly over two months, say 20% invested in an ETF initially and then 20% each two weeks thereafter to avoid  buying an equity fund at the top or selling it at the bottom of an intermediate wave cycle in the market. Conversely if the strategy has been on a Sell signal, don’t buy an ETF before the signal changes to a Buy signal.

For the ETF Local and Global Rotation Strategies (each expected to have about three ETF switches a year), only buy an ETF after MarketTiming’s Weekly Update bulletin has advised you to do so.

How to Respond to Subsequent Signal Changes

Our latest market timing signals are shown as either ‘Buy’ or ‘Sell’.

  • It is always best to enter the share market on a ‘Buy’ signal.
  • It is always best to exit the share market on a ‘Sell’ signal.

For all of our strategies, entering or exiting should be done the first trading day after a signal is issued by MarketTiming.

Fastidiously applying the signals and strategies of our computerised timing system should enable investors to avoid much of the downside of a market contraction while gaining much of the upside of a market expansion. But anyone using our strategy signals  needs self-discipline to succeed and be prepared to accept occasional losses (because no market timing system is perfect).

 


Disclaimer:

The material on this website is general advice only and does not take into account your personal financial circumstances, needs or objectives. Before acting on this information, you should consider whether the advice is suitable for you and your personal circumstances.

You should also read MarketTiming’s Financial Services Guide before deciding to use any of its strategies for trading ETFs. In addition you should read the Product Disclosure Statement for any ETF recommended by MarketTiming before purchasing that ETF.

MarketTiming’s FSG can be downloaded from http://markettiming.com.au/wp-content/uploads/2015/12/Financial-Services-Guide-Market-Timing_19-June-2017.pdf and the PDS for each ETF can be downloaded from the website of the ETF provider.

MarketTiming is a division of Kohler & Co (trading as The Constant Investor) whose Financial Services Guide can be downloaded from https://theconstantinvestor.com/wp-content/uploads/FSG_The_Constant_Investor-19_June_2017.pdf