The Dangers of Market Timing
One of the special dangers of market timing moves now is that we are in a period of very rare and unusually rapid events. By one measure, the daily swings in the stock market are the biggest since September, 1932. The worldwide drop is the most in such a short period in history. In another case, one numerical measure of fear that goes back 15 years, is at its highest point ever.
Given this backdrop, we are operating in the rarefied air of historically unusual outcomes for the stock market. The natural tendency is to assume the recent trends will continue: that would mean a continued drop for the indefinite future.
Right now, the market is like a coiled spring that could snap back a considerable way in a hurry or break from the pressure. There's no telling which way it will go although historical precedent would suggest that it's more likely to bend than break.
Since the downside threat is readily apparent to most people, let's turn to an unusual example on the upside. In the spring of 2001, a year after the tech bubble peaked, the broad stock market took a severe down leg culminating in a sharp, fear induced collapse in late March. Within two weeks, the Nasdaq Composite rallied 33 percent before starting a slow drift downward over the summer. After the attacks on 9/11, the market dropped sharply for a week after it reopened, then in late fall began a sharp rally. The market then traded in a narrower channel until March 2003 before staging a significant rally that lasted four years.
The point of this look at market history is to point out again how difficult it is to anticipate stock market moves. Waiting until the all clear sign becomes apparent is a good way of staying perpetually on the sidelines and missing out on the general market up trend.
I am not so optimistic as to suggest that no dangers remain in the economy or the market. Far from it, disaster scenarios are readily apparent. Still, it would be good to keep in mind that these periods of turmoil also breed opportunities for investors.