I always laugh when I hear people say that “you can never time the market.” I believe that not only can you time the market, but that you should always time the market. By that I don’t mean that you can time temporary ups and downs in individual stocks, that is a futile endeavor. What I mean is that you can spot general market trends, well in advance. There are times when you should be fully invested in equities, and there are times when you should be limiting your equity exposure. You can learn to identify these times by doing a little homework. The following are 3 different indicators that will assist you in recognizing future shifts in the stock market before they actually happen.
Indicator #1: Inflow/outflow of funds: you can monitor the general flow of investor’s money by looking which types of funds have raised the most money, and which ones have lost the most money. This signal serves as a counter-trend signal, meaning – you want to be invested in stock funds precisely when the investing crowd deserts stock funds and chases bond fund, etc. As of now, the Investment Company Institute recently reported strong money inflow to stock funds since the beginning of 2013.
Indicator #2: VIX: The volatility index, better known as the “fear index” measures the average volatility in stocks. In times of uncertainty, stocks jump all over the place, and the index gives a high reading. In times of complacency, the VIX is very low. It pays off to watch every time the VIX sits around its 52 week low, because this usually means that the investing crowd is too excited about stocks. We all know what happens once the general public gets too excited about stocks. As of now, the VIX gives a reading of 12.78, which is very close to the bottom of the 52 week range of 12.19 to 27.73.
Indicator #3: The 50 day moving average (DMA): As a general rule, you want to be invested in the stock market when less than 25% of all stocks are trading above their 50 DMA. This implies that the crowd is not too thrilled about stocks and that there is sufficient room for an upside. As of now, more than 93% of all stocks are trading above their 52 DMA. Historically, it has been a bad time to buy into stocks.