Market Timing Strategies

 

There are many ways that an investor can use our Timing Signals to invest in the market. Some use Options, Futures,  ETF's, or Mutual Funds, and others use a combination of two or more. There is no "right way" or "wrong way" to do it, but each of these methods have pros and cons associated with them. We suggest that you first examine your own investor profile to determine what your particular risk/reward ratio is, since each investor has a very different set of circumstances, preferences and experience. Here are some things to consider:

 Market Knowledge

Do you have a good understanding of investing and financial markets? Do you keep regularly updated on market news and current events? Do you read financial publications? Have you had work or schooling experience related to the investment market?

 Financial Risk/Returns

Are you willing to take on higher risk to achieve higher returns? Do you prefer a balance between risk protection and returns? Do want to invest with very little risk?

 Personal Financial Situation

Are you in a strong financial position in relation to your needs? Is your income stable or does it fluctuate? Is your income moderate? Does your financial position allow little or no room for risk?

Ask yourself the questions above, write down the answers. Think about what your financial and investment goals are relative to your present financial situation. You will need to establish how much a prudent person in your position should commit to the stock market.

Once you are comfortable with this, the next step is to decide what investment to use. Our preference is Mutual Funds. We use the Rydex Funds. This family of funds was invented for the sole purpose of meeting the needs of the market timing community. Later another company was formed that does virtually the same thing, named Pro-Funds. Both of these companies allow twice a day trading, and have no commission to buy, sell, or exchange between their funds in the same class. Their minimum account size is very affordable to the average investor, and they both provide excellent customer service for clients. 

Options and Futures both require a lot of paperwork and have risks not found in the Mutual Funds. 

ETF's trade like a regular stock, but charge a commission to buy and to sell. They also have a spread--the price difference between the "Bid and Ask". These costs can add up over time and have a dampening effect on your overall return.  They are, however, traded throughout the day, which is a positive factor, but not enough in our opinion to warrant the additional costs.  

The Four Basic Strategies

There are four basic strategies and many advanced strategies that can be utilized to manage risk:        

Strategy 1: (Ultra  Conservative) Long- in the market only during buy signals 

Strategy 2: (Conservative) Long & Short- always in market except during cash only

Strategy 3: (Aggressive) Long- with 2 beta*    

Strategy 4: (Ultra Aggressive) Long & Short- with 2 beta*     

 *2 Beta means that the price will move twice as much as the price of the underlying index. If the index goes up by 2 points, then the fund will move up by 4 points.  This is also true if the index goes down, then the fund will go down twice as much. Since the index and the fund have different values, it would show up as a % change of 2x.                                             

There will be times when we will signal that we have entered a PPP (Potential Pivot Point), which many times precedes a change in the market trend.  Since the trend ahead is not clear, you may want to reduce your market exposure by some percentage. We would recommend a 50% cutback to those investors who have a conservative bent.  When the PPP "all clear" is given, then move back to your original position, or follow the next signal. Some ultra conservatives may look at the PPP as a "get out" signal. However you view it is a matter of personal choice.

Using Rydex Dynamic Funds

Conservative and aggressive investors alike can both use the Dynamic Funds to reach their goals without changing their investment styles. Let's look at an example for both:

Example 1: Conservative Investor with $10,000 to invest without using the 2X beta risk. 

By investing only $5,000 and using the 2X beta fund, you would achieve the same dollar amount of return on each trade as if you had used a 1X beta fund and put in $10,000.  You could then use the remaining $5,000 to put into a money market fund or a CD,  which would increase your total return by the amount of interest earned. If you made 16% in the market and 4% in the CD, your overall return would equal 20%.  This is a good Money Management tool, and increases your chance of being a successful investor while at the same time managing your risk and remaining conservative. 

Example 2: Aggressive investor with $10,000 to invest using the 2X beta risk.

The aggressive investor would use the full $10,000 to invest in the 2X beta account and as a result would have twice the movement as the index itself. The ability to move in and out at no charge allows for adjustments to be made whenever you desire.  Let's say that a PPP came into play and you wanted to pull back some. You would simply call the fund company and move some money out of the Dynamic Fund into the money market fund. If you wanted to cut way back to only a 20% market exposure, you would keep 10% in the market and move 90% into a money market. The 10% at a 2X beta is like having a 20% at 1X beta. You are able to adjust your position twice a day. In the morning one hour after the market has opened, and at the end of the day.  You have full control over the amount of market exposure simply by deciding what percentage to employ at any given time.

Some of our subscribers use more than just one fund in the Dynamic Family. You have your choice of the NDX, the S&P500, the Russell 2000 and the DJIA. All four of these funds also have inverse shares for those of us who also want to play the short side of the market. They work the same to the short side as they do to the long side with a 2X beta. The NDX fund will normally have more price movement than the S&P500. With this in mind, one may want to use the NDX when the market appears very strong and move to the S&P500 if the market is starting to weaken. There are numerous strategies that can be employed, and with no cost involved for exchanging from one fund to another.