The end of the stock market’s correction may be near.
That’s because I just received an email from a prominent money manager declaring that “buy and hold is dead.” Like the first robin of spring heralding warmer weather around the corner, emails such as this one are a contrarian signal that the tide is about to turn.
That’s because the relative popularities of market timing and buying-and-holding follow a fairly predictable cycle. Buying and holding will be at its most popular at market tops and least popular at bottoms. Just the reverse will be the case for market timing.
This cycle exists because investors are like the generals always fighting the last war. During bull markets investors learn that buying and holding is the most profitable course of action, and that every dip is a buying opportunity. They continue behaving this way even after the market’s trend turns down.
By the time the bear market nears its end, however, these erstwhile buy-and-holders have become converts to market timing. And so when the trend turns back up again, they will engage in market timing—which during bull markets almost always causes their returns to be less than buying and holding. They therefore will be maximally frustrated by the time the market hits its subsequent high, at which point the cycle starts all over again.
One consequence is that headlines declaring that “market timing is dead” become more frequent near stock market tops. At bottoms, in contrast, we start seeing headlines declaring that “buy and hold is dead.” That’s why I sat up and took notice in early March when I received the email declaring buy and hold to be dead.
To be sure, this market timing popularity cycle is more qualitative than quantitative, and can’t be used to precisely pinpoint where we are in the market cycle. Last May, for example, I referred to this cycle in arguing that the “bull market is in late innings.” As we know now, of course, the top wouldn’t come until November or December (depending on which market average you use to determine the top).
That said, there have been times when this contrarian indicator came much closer to identifying market turning points. Take October 2008, in the middle of the Global Financial Crisis. That month came in the immediate wake of the collapse of Lehman Brothers and the world’s financial system grinding to a halt. Using the market timing popularity indicator, I argued that a market bottom was “not yet at hand.” The ultimate bottom, as we know now, didn’t come until the subsequent March.
And one week prior to that bottom, I argued that the indicator was telling us that “the bear market may very well be nearing its end.”
You might think it’s premature to even be having this discussion, since we’re not even in a bear market. At its lowest close in late February, for example, the S&P 500
was 11.9% below its all-time high. That’s barely into correction territory, and well short of satisfying the semi-official criterion of a bear market as a decline of at least 20%.
But the S&P 500 is dominated by large-cap stocks, and mid- and small-cap stocks have fared much worse. The Russell 2000 index
for example, did enter official bear market territory in late January, when it closed 20.9% below its November all-time high.
Not taking a position on market timing generally
Note carefully that this discussion has nothing to do with whether market timing is or is not a good idea. My point is that, regardless of the merits of market timing generally, its popularity fairly predictably waxes and wanes as the market’s pendulum swings between bull and bear phases. By paying attention to its popularity, we gain insight into where we may be in that pendulum swing.
It may very well be, for example, that your financial planner advises you not to engage in market timing but to instead stick to your financial plan through thick and thin. If so, the market timing popularity cycle can still help you. That’s because you’ll be most tempted to stray from your financial plan at the bottom of a market decline, when others are declaring buy and hold to be dead. This popularity cycle teaches us that these points of maximum temptation often come when the market’s trend is about to turn, and knowing that can help you stay the course.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected]