Random Roger On The Art Of Market Timing

This is a point in the cycle where it is easy to get fooled. The market is down almost 20%, I’m sure if you looked you could find an indicator or two to tell you the market is oversold, stocks that are down 20-30% do have some appeal and many of the historical “every time the market does such and such” statistics give a bullish conclusion because the market goes up almost 3/4 of the time.

These sorts of things can be very compelling and enticing.

Compelling as they may be, if it is a bear market all of these things will be wrong. Bear markets last longer than five months and on average go down more than 20%, closer to 30% actually. So anyone giving in to a compelling case for buying now is fighting a big cyclical headwind.

– “Sentiment”, Random Roger’s Big Picture, Monday March 10, 2008 (bold and italics added)

One of the things I’ve come to learn about the stock market, and so many other aspects of practical life, is that it is an art and most definitely not a science.  There is not some indicator or method that is foolproof and works perfectly every time. 

While “it’s different this time” is almost always wrong, it is different in small and nuanced ways every time.  Things won’t develop exactly the same way this time as last time because the details are different, including the fact that many participants lived through the last time and that has affected their outlook.

Compelling arguments can be made on both sides in most issues of practical import, including the stock market. 

There are many reasonable arguments for buying stocks now: we’re down 20% from the highs and that’s generally as far as it goes, valuations are reasonable, the global growth story, etc…

That said, arguments can be made for the bear case as well and those considerations currently carry more weight for me.

It is a matter of judgment and art, not certainty and science.

Random Roger has an excellent post on this topic this morning, including issues such as valuation and cyclical bottoms, buying consumer staples and whether to get completely out or simply cut back on stock exposure.