Hamilton's E-Wave Analysis

TSX and market timing.

TSX feb 12 2016

They say you cannot time the market. “They” are your banker, investment advisor, mutual fund salesperson and so on and so forth. They passionately want you to believe that, simple because if you could, they would all become superfluous. Mostly they are but they don’t want to make it obvious.

If you think math is fun you can go for the standard deviation stuff, on some websites it is available and you can pick your preferred deviation. There are also Bollinger bands and other such stuff. The easiest way is to do it yourself.

Most charts go from the bottom left to the top right, simple because the y and units are chosen in that way or the chart size adjusts to be filled (like fitting to the page when printing). The angle at which the line rises is a function of growth (population or wealth) and productivity. In the main it is fairly constant over large periods of time. In the TSX case the index doubles about every 15 years which corresponds to a growth rate of about 5% (rule of 72). If you want to complicate things you could use a semi-log scale. We have not here so if we wish to measure 25% above or below (the blue lines) we should get a fan. The fan expands as we use a larger deviation from the mean (in black), as for instance when using 30%.

If you do this for , say 20% you might get some thing like this;

You would have made 6 trades (of course you can do portions rather than the whole), 3 sells and 3 buys (we do not use stops, which maybe you should!) On the first set of trades you break even, on the third trade you make 3 your money and on the 5th about 2X. Presently you are long at 9000, good for 1.3X if you were to close out. That adds up to 3x2x1.3=7.8x and since you start with 3000 you now have 23.400, that is double the present market value.

You can increase or decrease the sensitivity, that is widen or narrow the fan. A very wide fan would replicate a buy-and-hold approach, what the industry wants except when they want to earn something themselves. A very narrow fan would resemble the famous day trader.