
Shall We Play a Market Timing Game? (2018) - deanmoriarty
https://engaging-data.com/market-timing-game/
======
Majromax
> Update: Added a Monte Carlo mode which lets you play with data that is
> randomly generated from the daily returns of the S&P500. The probability of
> a daily return being picked is the same probability/frequency that it
> occurred in the last 68 years.

This mode is rigged.

Any proposal for market timing requires correlated returns. "Technical"
traders infer short-term trends form patterns like the shave-and-a-haircut and
lovely-lady-humps that are ultimately based on a theory of market psychology,
and "fundamental" traders usually make structural observations like price-to-
earnings ratios being mean-reverting.

Both of these hypotheses are excluded _by construction_ when market results
are constructed by a random draw of daily returns.

~~~
jcfrei
They could easily create a better simulation with a moving block bootstrap
method. That is by sampling consecutive returns (for example for a whole week)
and create a new time series with them.

~~~
hogFeast
Yep, I have a tool that is similar to this and this is what I did.

Unfortunately, if you are working with daily returns you need consecutive
returns for way more than a week. You have correlated returns, in particular
there are Friday-next Monday correlations that are important in the tails. You
also have volatility clustering/asymmetries over daily periods (i.e. high
volatility tends to be followed by higher volatility and the volatility
responds differently to up vs down moves) and this tends to last way longer
than a week.

It is very tricky stuff. In the real world, you will often find managers
grouping based on their knowledge (i.e. X-Y was the 2008 crisis) and testing
their portfolios against that. It is rather unscientific but it works (i.e. in
this case, you might do something like a Markov model with a transition matrix
of the daily probability of moving between volatility states, and then sample
longer blocks from groups based on the state).

A simpler option (what I did) is to just look at yearly returns, and sample
across countries (just using the US is horrible cherrypicking).

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dnpp123
Cool but although I agree with the general message :

"The market returned 214.6% during this period or 21.05% annually."

This simple math statement is wrong and makes me wonder about this website
accuracy.

edit : yes this was for a period of 9 years on the market which should be
around 9% annual returns instead.

~~~
thaumasiotes
I don't see that text on the page. Was it a 6-year period? If so, the accuracy
is basically perfect. (21.05% annual growth will return 214.6% after 5.9996
years.) Otherwise, weird.

> edit : yes this was for a period of 10 years on the market which should be
> around 8% annual returns instead.

How did you get a period of 10 years? It runs in 3-year increments.

~~~
andreareina
You get some text in the Results box after you finish.

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vidanay
I predict that the market will see a handful of the largest single day point
increases within the next six to ten months.

Just a prognostication on my part, it's worth exactly what you paid for it.

~~~
Klinky
I'd expect percentage losses as deep as those seen in 2007/2008\. This isn't
just paper money drying up, it's the inability to physically work. It's not
just a matter of injecting a ton of capital into the economy, literally that
capital cannot do anything if people can't work.

We'll also see hyperspecialization towards COVID-19 in the health sector,
which could leave those industries vulnerable when COVID-19 finally runs its
course(likely many months from now).

Some industries are already failing, and will need propped up. If not, then
those industries will take awhile to recover after COVID-19 runs its course.

Also I'd be incredibly wary of huge single day gains. Consistent slower gains
is a better sign of a healthier economy than the spiky behavior we've seen as
of late indicating people are heavily speculating on the volatility.

~~~
vidanay
The big difference is that 2008 was a systemic recession. This one will likely
be situational.

~~~
aguyfromnb
> _The big difference is that 2008 was a systemic recession. This one will
> likely be situational._

"Systemic"; what does that even mean? That the crisis was related to the
financial system? Yes, it was one type of financial crisis.

We are now in another. If you believe that the unravelling we are seeing is
simply because of the Coronavirus, I think you will be disappointed. While
this may not be the same as 2008 (no two crises are the same), there are a
number of "systemic" issues in the world that will come under pressure:

    
    
      - Privately held companies with ridiculous valuations (WeWork, SpaceX)
      - China having taken on more debt in 10 years than anyone, ever
      - Negative interest rates around the world going *into* recession
      - The shale industry blowing up
      - Housing bubbles that didn't implode in 2008 (Canada, Australia) coming under pressure
      - Fiscal and monetary stimulus in the US like we've never seen
      - Risk Parity unwinding
    

These are off the top of my head. Maybe they all mean nothing, but I doubt it.

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dpc_pw
This is such a nonsense being pandered by people who make money on it.

You, you can absolutely "time the market". You just can't do it exclusively
based on the chart. The real world is still there, and it's important, you
know? And Stock Market and savings accounts are not the only investment
instruments available to people. And you don't have to be all in or all out.

Maybe if you don't have time and skills to think about it, etc. then this
makes you feel better about your "investments" because "there was nothing you
could have done better". But it's still load of rubbish.

~~~
heartbeats
Agreed. I read about the coronavirus and decided to pull some of my money out
- that's probably earned me 10% so far.

~~~
remote_phone
I read about coronavirus and bought puts when the market kept making new
highs. I’m currently up $100k, with $80k already booked profits and riding the
last $20k as a hedge against my new long positions. I also bought Gilead and
Moderna and am up $15k and $5k, respectively.

I believe we are near a short term bottom and will bounce in 1-2 weeks. Most
of the bad news is out and I expect better news in the coming weeks
(quarantine is working, remdesivir/chloroquine is effective). Then I predict
after the short bounce that the economy is so damaged that we make new lows

I’ve been timing the markets for 20+’years now. Just because some people can’t
doesn’t mean that everyone can’t.

~~~
lonelappde
How is it possible that in 2 weeks we'll have news that quarantine is working?
The general publicly isn't even taking it seriously yet.

It'll be at least 2 weeks evem before testing capacity is ramped up enough to
measure population-level success at quarantine

~~~
remote_phone
Italy and the rest of Europe will be 4 weeks into their quarantine in 2 weeks.
If we see results over the next week or two then the US markets will skyrocket
because it means it will work here too.

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raphaelrk
I don't have much experience in the market, but "invest in index funds" seems
like a way to inflate the values of all the companies in the index fund,
deserved or not, and I find it worrying that it's touted as an easy/simple way
to make money. If there's a lot more index fund money than hedge fund / active
money it would probably mess with prices, right? Is there any good analysis of
when it would stop making sense to invest in an index fund? Or ways to weight
certain companies higher or lower in a 'personal' index fund?

~~~
thekyle
> If there's a lot more index fund money than hedge fund / active money it
> would probably mess with prices, right?

No, assets under management is irrelevant to price discovery. Trading is what
sets prices not holding stocks. According to a 2018 Vanguard paper index funds
only made up around 5% of trading volume despite holding about 50% of assets.
So active managers are still responsible for 95% of price discovery even if
they hold only 50% of assets.

[https://personal.vanguard.com/pdf/ISGBEL.pdf](https://personal.vanguard.com/pdf/ISGBEL.pdf)

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jbullock35
Interesting. Would be even better if it let you download data on returns at
any point. For example, you might pause after Day 200, download data on the
S&P 500 for Days 1-200, analyze the data, and then proceed accordingly.

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lend000
The "Buy and hold ETF" strategy of today is good advice until it isn't.
Eventually, ETF holders will probably be exposed to a black swan like the
NIKKEI 225 lost decade event (although it should probably be called the lost
_decades_ ) [0].

My opinion is that buying and holding the index is better than picking stocks
and timing the market unless you are a professional (you need to be doing it
full time to gain a consistent edge, and even then it isn't guaranteed).
However, even then, it is only good advice if equities is a small part of your
overall portfolio. Blindly buying and holding the index is not smart if your
net worth is 80% tied in equities -- you should diversify in bonds, real
estate, precious metals, and other commodities.

[0]
[https://en.wikipedia.org/wiki/Japanese_asset_price_bubble](https://en.wikipedia.org/wiki/Japanese_asset_price_bubble)

~~~
slothtrop
You can already do this with ETFs, e.g. with Aggregate Bond Index ETFs, and
the All Cap I invest in includes basic materials, oil & gas. The REIT ones can
be more expensive.

Only going for equities is risky I agree, but I don't see this as an ETF
problem.

~~~
lend000
That's a good point, I'm really referring to stock market indices.

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c06n
Generally, in markets that were part bearish (like the 80s), I made very good
returns, between 10 % and 30 % above the index. As a very simple rule, after 2
days of a falling index, sell for exactly 1 day. This works mainly because
there are enough consecutive 3 days of a falling index. However, if the market
trend is overwhelmingly bullish, that does not work anymore, because there are
not enough triplets of falling numbers. If it was possible to differentiate
the two, I guess it would be possible to reliably beat the index. But of
course that is the tricky part ... You cannot be better then the index in
rising markets, but you could be better in falling markets.

~~~
thaumasiotes
> You cannot be better then the index in rising markets, but you could be
> better in falling markets.

That's because the only actions you can take in the game are "buy the index"
and "sell the index".

As soon as there's more than one price in the market (even, say, one index
tracking DJIA and another one tracking S&P 500), it's possible to beat the
market average while prices are rising.

~~~
c06n
Not saying you are wrong, but what algorithm would you use to achieve that?

~~~
thaumasiotes
Always invest in the one that's increasing faster than the other one.

I'm not saying you can do it without knowledge of the future. I'm responding
to the (correct) observation above that it isn't possible to beat the market
average while it's rising, no matter what you do, even if you do have
knowledge of the future -- as long as the only options you have are "buy the
index" and "sell the index".

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hinkley
I successfully played a market timing game with Apple stock for years. It
stopped working after Steve got sick. But I’ve probably wiped out half of
those gains with buying or selling some other stock right before things went
sour.

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empath75
This just shows that so-called ‘technical’ analysis with no context is about
as useful as trading based on horoscopes.

Add in some information like ‘a new pandemic threatens to shut the world
economy for months and kill tens of millions of people’ and suddenly this
changes.

~~~
czbond
Technical analysis has validity - it is just patterns and data. It isn't
perfect, because outcomes are still variable, and also consist of independent
human decisions.

A pandemic is an edge case... However, markets react much more quickly than in
the past (algorithms, global data, instant analysis of that data) - that
technical analysis short term timelines have compressed.

If you want statistical breakdowns of each pattern, their movements, and
outcomes - this book is a great reference.
[https://www.amazon.com/Encyclopedia-Chart-Patterns-Thomas-
Bu...](https://www.amazon.com/Encyclopedia-Chart-Patterns-Thomas-
Bulkowski/dp/0471668265)

~~~
pembrook
That book is essentially a collection of newspaper horoscopes.

Trading off data and patterns is a valid strategy, but the book you referenced
doesn’t show you how to do that. (drawing pictures over charts and making
subjective conclusions based on what you drew is not a data driven strategy).

Read the recent book on Rentech (the man who solved the market is the title I
believe) to better understand how difficult it is to actually beat the market
using data.

Once you read about a firm who _has_ consistently beat the market—-and how
tiny their edge actually is—-you’ll put the notion that you have the resources
to do so on your own to bed.

~~~
quickthrower2
I wonder how the firm did this year?

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brownbat
Sure. It's a really bad idea to try to time the market on a day to day basis.
There's two sides to every trade, so you're generally playing poker against
professionals with armies of quants.

But this game really just proves that you can't time the market while knowing
nothing about the outside world.

Headlines sometimes matter.

Not all the time. Talking heads generally overstate how much one random speech
matters, "politician X says Y, therefore stocks are reacting" is generally
just over-analyzing noise. It's annoying to see post hoc rationalizations the
norm in financial... in all news. People claim causation for anything they
happened to read.

But occasionally, once a decade, say? Headlines do send a strong signal.
"Crisis on Wall Street as Lehman Totters" was a headline that came just before
the biggest cliff in 2008.

In February 2020 we didn't know as much as we do now, but people already
started talking about difficulties in containment. China--which likes itself
some economic growth (if only to keep the Party going)--decided a near total
economic shutdown was necessary. The virus was already in a few dozen
countries and Singapore was surrounded by container ships that couldn't dock.

So let's split out two separate claims:

1) The weak efficient markets hypothesis: you can't time the market blind.

2) Strong EMH: you can't time the market, not even once in a while, with your
eyes wide open.

In defense of (2), the housing crisis really started in October 2007, and
ended in February 2009. You can delve for headlines for those moments, but
they are way more specious. Here's the real test: what will be the best signal
of the rally after the pandemic?

1) China hitting zero active cases, reassuring the world it can be done.

2) Global new case "growth rate" below 1 for two straight weeks? [Growth rate
being the ratio of today's new cases to yesterday's new cases, with lower than
1 a tipping point away from exponential growth, and probably the halfway point
in the crisis.]

3) China keeping no new local cases even after reopening its economy?

4) Some decision about how to keep airlines solvent?

5) Unemployment nearing historical normals after skyrocketing beyond anything
we've ever seen?

Any of these seem plausible. But who knows which will be right? However, if we
are attacking strong EMH, we don't really have to time things maximally, we
just have to do slightly better than the index. So maybe just wait until the
S&P 500 has recovered a quarter of its losses and get in then?

Maybe the general problem with active investing is the financial sector's
approach: hire people to study market signals full time and generate
algorithms that can trade more and more actively. Full time people are
expensive, and tuning algorithms is expensive. So that means you burn through
fees (on top of probably not outperforming the market, because you're
competing against noise).

If you hire people to do something full time, they will find ways to justify
their time. If you hire someone to play rock paper scissors full time, and
give them some of the highest bonuses in the world, they will come up with
some very nice models. And usually not outperform a random thrower, but give
you lots of reports on why and how they'll do better next time.

But if all the daily signals are noise except for one really blaring foghorn
once a decade, maybe the better solution would be to hire a part time market
hobbyist on a contingency fee. "Hey, if you see a signal that the entire
market should be shorted, maybe short the market. You get two trades per
decade max. Otherwise, just index and hold."

Probably also wouldn't work, but I really like the idea of some plumber in
Poughkeepsie controlling billions of dollars in hedge fund money, you know,
just as a side hustle.

~~~
corey_moncure
The Efficient Market Hypothesis is obviously, patently false. The markets
cannot agree on the value of an asset from week to week, day, hour, minute or
second. Equities in stable businesses with millions of shares traded daily see
their prices fluctuate 5%, 10%, 20% intra-day. The tangible value of a company
simply does not change that fast. It doesn't.

It's impossible to time the market perfectly every time because that would
imply perfect knowledge of the moves of all the participants. By the same
token, it's impossible to mis-time the market every time, because then you
could just take all the opposite moves and you're back to winning. It is
possible to win more than you lose, not by being the smartest, but simply by
being smarter than the average participant. Which, thanks to companies like
Robinhood putting trading capability into the hands of any naive smartphone
owner, has become easier than ever.

~~~
socketnaut
You need to be smarter than volume-weighted average, not smarter than the
average participant. The demographic you have in mind is trading relatively
small amounts of capital.

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legulere
Is there also a version with the Nikkei 225?

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RickJWagner
Excellent game! I gave it a shot, failed miserably. Index investing is best
for me.

