Analyst makes case for market timing

(June 10, 2004) Buy and hold is something of an axiom in the mutual fund industry. Trouble is, this strategy hasn’t worked for the last four years and it isn’t likely to work for the next 11, according to Don Vialoux. Yes, Vialoux is, dare one say it, a market timer. He thinks you ought to be one, too.

Vialoux is a technical analyst and chartered market technician (CMT) with 37 years in the investment industry, many of those with his former employer, RBC Investments. He spoke this week in Toronto at the third annual Canada Cup of Investment Management.

“You can time the market,” says Vialoux. “The key is to use a number of analysis methods — fundamental, technical and seasonality analysis. You will make a profit for your client seven or eight times out of 10, but you are going to lose money two or three times out of 10.”

Vialoux is careful to caution advisors about acting on just one method; these analytical methods must be used in combination.

By the end of his talk, it became apparent why this caution is necessary. His numbers give a compelling argument for a seasonality approach to markets and it is surprisingly easy to implement.

Vialoux has found that during the last 70 years, markets (represented by the Dow Jones Industrial Average) have moved in 16-year cycles, alternating between flat, choppy prices and periods of sharply higher prices.

• 1934-1950: Market was essentially flat with much volatility
• 1950-1966: Market increased by 400%
• 1966-1982: Market was again flat with much volatility
• 1983-1999: Market went up 1,000%
• 1999-2015: If the pattern is consistent, the market will be essentially flat

(The supporting charts can be found on www.dvtechtalk.com under The Markets/presentations/Timing the Market with Exchange Traded Funds.)

During periods of rising prices, the buy and hold approach will let your clients prosper. In the other less-agreeable 16-year periods, market timing, Vialoux believes, will help you wring out profits by taking advantage of the intermediate swings.

He gave four examples of market-timing plays — a seasonality approach to the broad markets in Canada and the U.S., a few sector seasonality plays, a technical market cycle approach and a U.S. presidential “four-year cycle ‘sweet spot.'”

The simplest of Vialoux’s strategies is a broad market play that advocates “Buy when it snows, sell when it goes.” If you had invested in the TSX Composite Index from the end of October to the end of March, you would have realized 81% of the market’s total gain in seven of the last 10 years, he notes.

Seasonality is even stronger in the U.S. From the end of October to the end of April, a position in the S&P 500 would have captured 100% of the market’s gain in seven of the last 10 years.

Vialoux has found some interesting sector seasonality, too:

Sector	Period (end of)	Average Return	Profitable Periods
High tech (Cdn.)	Sept. to Jan.	16.4%	8 of last 10
High tech (U.S.)	Sept. to Jan.	13.4%	7 of last 10
Energy (Cdn.)	Jan. to May	12.0%	9 of last 10
Healthcare (U.S.)	Aug. to Nov.	8.9%	10 of last 10
Forest products (Cdn.)	Nov. to Apr.	12.2%	8 of last 10

Vialoux, who publishes a free daily letter on his Web site, www.dvtechtalk.com, says he has also found a sweet spot for Canadian fertilizer stocks from the end of June to the end of December. He thinks this may be because farmers buy supplies for the following year for the tax relief the pre-December 31 expense will give them.

Intermediate cycles within the broader 16-year cycles can also provide some opportunity, says the analyst. These cycles range from five to 15 months from beginning to end (bottom to mark down) and if you can determine where the market is on one of these cycles, you can ride it to the peak.

Vialoux believes the Canadian market is approaching the breakout phase and that the U.S. market has just reached it, which means both markets should be in for some gains over the short term.

His last strategy exploits a historical pattern of market gains in the year of a U.S. presidential election. Looking over the last 100 years, Vialoux says that from the end of May to the end of December in an election year, the Dow has had an average gain of 10.6% and went up in 80% of those periods.

However, the last six periods have not been quite as positive. He reports that the S&P 500 showed an average gain of 8.4% in five of the last six periods. The Canadian market may follow this pattern, too, but not surprisingly, in a more subdued fashion. The TSX has returned 6% in four out of the last six U.S. election periods.

However, lest you want to try this one out immediately, Vialoux suspects the winning pattern may not hold when the outcome of the election is uncertain, as it looks to be now.

Vialoux points out that these market-timing methods can be easily implemented using exchange traded funds (ETFs), which give quick, inexpensive and very accurate exposure to broad markets and sectors. Using ETFs to time the market is a good example of employing passive products in an active strategy, an approach that ties in well with the conference’s subtitle: “Where active and passive management meet.”

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What do you think of Vialoux’s market-timing theory? Discuss the ins and outs of his analysis with your peers in the Talvest Town Hall on Advisor.ca.

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Donna Green, MA, CFP, is a personal finance writer and assistant author of The New Investment Frontier: A Guide to Exchange Traded Funds for Canadians, and Surprise! You’re Wealthy: A Woman’s Guide to Protecting Her Wealth.

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(06/10/04)