There is a certain satisfaction in buying a market low nearing the turning point and riding it northward. For the momentum strategy described over the previous posts, using 12 month ROC to select a fund, what is the effect on profit and ‘time in market’ of timing the dips.
Another way of asking this question is: given the equity curve for ‘always in’, is there a way to reliably sell the high points and buy back lower? Recessionary periods are filtered out as described here.
Annual return 34%, Max. DD 15%, Sharpe 2, Exposure 80% (time in market)
Inspecting the above equity curve shows the difficulty in picking spots to sell in order to buy in lower.
TIMING THE LOWS (buy when > 1% of stocks are down 25% in a month)
Annual return 25%, Max. DD 12%, Sharpe 2.5, Exposure 50% (time in market)
The result is to give up a quarter of the annual returns in exchange for 40% less exposure. This is due to the exits, not the entries. The horizontal green lines of the equity curve denote sidelined periods in cash, several during extended rallies.
This shows that:
1. Timing the rally tops is more difficult than the lows due to a difference in market behaviour.
2. The simple exits modeled are inadequate to detect when an uptrend is over, thereby missing several extended rallies. (Pradeep at Stockbee uses a variety of measures to determine this qualitatively including breadth on several timescales and quantity of junk stocks making large moves, which tends to signal the approach of the end).
3. There seems to be a strong disadvantage to timing in this test, for this strategy, in terms of max. drawdown and profit.