“Do I contradict myself? Very well then I contradict myself, (I am large, I contain multitudes).” -Walt Whitman

Yesterday I wrote that you shouldn’t try to time the market. This is only true to a degree. Today I will contradict that notion by saying IF you can effectively time it you should do so. And by “effectively time it” I mean “use a proven methodology.”

Many people would say that Warren Buffett doesn’t time the market. He’s known as the most famous of long-term investors. However, Buffett does use an effective method for timing the market on a long-term time horizon.

His methodology is based on fundamental, value investing. When stocks are expensive and he doesn’t find opportunities to “deploy capital” (those are his words meaning “buy”) he simply doesn’t do any buying. In fact, this is one of the traits of all great investors: a willingness to do nothing when there is nothing to be done. It sounds a LOT easier than it is. Trust me. Due to the way his company is set up cash builds up in his account and his overall exposure to stocks is reduced. When stocks sell off he finds opportunities to buy again and thus increases his exposure to stocks. Clearly, this form of market timing has served him very well.

Others, like hedge fund titan Paul Tudor Jones, have made a career out of “swing trading,” literally selling at tops and buying at bottoms. They use a variety of tools such as “tape reading,” chart analysis and/or sentiment to time a variety of different markets. Don’t ask me to explain all of these; neither of us have that kind of time.

Both Jones and Buffett have posted returns over 20% per year for decades absolutely annihilating the major market indexes. So when someone tells you, ‘you can’t time the market,’ ask them to clarify: ‘You mean I can’t time the market or it’s not possible? because I know a few guys who have done it successfully for decades.’ YOU might not be able to time the market but that doesn’t mean it can’t be done.

In fact, I have had success over the years using methods similar to Buffett’s and Jones’. And the reason I bring this up is that my methods are starting to validate what all those smart guys I wrote about yesterday are saying. While stocks aren’t expensive they are starting to look a little tired in the short term. The Dow did rally nearly 600 points this week. It deserves a siesta.

Technically, the charts are starting to look a little precarious to me. The banks have gone absolutely parabolic; small caps have broken out but a test of the break (a pullback to the breakout level) is to be expected; the major indexes have yet to follow the lead of the banks and small caps – they’ve rallied huge over the past four trading days but remain below important resistance levels AND indicators like daily stochastics are setting up divergences (confirmation is good; divergence is bad).

Still, stocks are reasonably valued and investors have yet to become euphoric over this recent rally. So while the charts are making me nervous the stars aren’t quite aligned for a top to be put in just yet.

I contradict myself today because I believe that we all “contain multitudes” and that we are better investors, spouses, friends and people when we are mindful of these. Suppressing ideas doesn’t work for me. I must acknowledge them and then try to decide how much faith to put into each. Such is my situation with market timing. I have a few different methodologies I believe in. I put a different amount of faith into each.

In practice when my technical strategy tells me to take risk off I don’t sell everything. I don’t have to do so in order to recognize the value of this idea. I merely have to sell the amount that satisfies the degree of faith I put in this signal balancing it with my faith in the power of compound interest. I know that over the long-term it pays to stay invested. I also know that I can add significant value to my process by adding a market timing component. So I do both even though they contradict one another.

For you in your investments you must determine your “circle of competence,” to poach another Buffett phrase. Do you have both the ability and the emotional fortitude to implement a form of market timing into your methodology? If you do not then you will hurt yourself more than help yourself in trying to implement it. Know what you know and do only what you’re capable of doing.

Chart of the Day

sc (8)Look at that rally. If all the talk about the “fiscal cliff” scared you out of the market last week then you’re market timing methodology really stinks. I’m watching those stochastic lines on the top of the chart. Should they cross down at a lower level than they did mid-December (80ish) then I will turn bearish over the short-term (this is a daily chart so I’ll match my time frame with that of the chart).

Hit the Links

  • Apple Fanboy/Pro User: The latest version of Android outshines the latest version of iOS in almost every single aspect (Gizmodo)
  • Almost All of Wall Street Got 2012 Market Calls Wrong (Bloomberg)
  • 4 great quotes from super-investors (Philadelphia Inquirer)
  • Whoops: Small Investors Moved Out of Stocks Last Week In Fear of Fiscal Cliff (Pragmatic Capitalism)
  • 5 historical manias that gripped societies then disappeared (Mental Floss)
  • Are Stock Pickers an Endangered Species? (WSJ)
  • Parenting Pro Tip: Chinese dad hires virtual assassins to harass video game-obsessed son (The Next Web)