Most investors find that timing the market, which is trying to determine whether to be invested or not, is not something that is within reach.
My experience tells me that not only is it possible, but it is also very important in these volatile times.
The ‘market’ can be illustrated by looking at the performance of the S& P 500 index, which comprises a good section of the United States economy.
The above graph shows the S&P 500 index, ETF: SPY, as of the close on Friday, December 4, 2020. It shows that there was a significant decline beginning at the end of February 2020 with a nice recovery starting in April 2020. It would have been ideal to find some way of getting out of the way of the decline and getting on the right path in April.
There is that kind of early, or at least not so late way, of doing just that!
In the past, which is certainly no predictor of future behavior, the movement of the U.S. Treasury note and bond market, has behaved in an almost opposite manner to the equity market. The avoidance of equity risk has shifted the money flow into the safe haven of U.S. Treasuries and vice versa. In the past then, the equity market has been negatively correlated to the Treasury market. So, when equities are getting strong, Treasuries should be getting weaker, etc.
I have chosen an ETF which is a good indicator of the U.S Treasury market: EDV, the Vanguard Extended Duration Treasury ETF.
Prices reflect the close of December 4, 2020.
The following chart shows the relationship between the price movement of SPY and EDV during the period of February 2020t to the close of Friday, December 4, 2020.
SPY is represented by the green line and EDV is represented by the red line in section three of the graph.
The next line shows the relative strength of SPY versus EDV. Green shows that SPY is stronger, Red shows that it is weaker.
The same is true on the bottom part of the illustration. The cross indicator on the individual ETFs show positive or negative momentum of the individual ETF.
The answer then is that one could make a market timing decision by watching the relative strength between equities (SPY) and Treasuries (EDV) and act accordingly. Purchase the equity market when it is in a positive relative strength to the Treasury market, which is represented by the Green vertical lines. Stay on the sidelines when it appears that the Treasury market is stronger than the equity market, the Red lines.