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Wall Street, California | PORTFOLIO STRATEGIES

Year's Volatility Upending Many Professional Market Timers

August 22, 2000|JOSH FRIEDMAN

These are trying times for many professional market timers.

Timers--a breed of investment strategist who uses technical analysis to try to predict, and play, major market moves--are frequently finding themselves whipsawed by this year's wild market swings.

"This is a very different kind of a market than we've seen for some time," said Michael Burke, editor in chief of Investors Intelligence, a New Rochelle, N.Y.-based newsletter ([914] 632-0422; http://www.investorsintelligence.com; $184/year).

Some timers whose indicators normally change every 15 months have seen them change six times in six months, Burke said.

Take, for example, Dan Sullivan, editor of Seal Beach-based the Chartist ([562] 596-2385; http://www.thechartist.com; $175/year), a respected newsletter whose timing portfolio racked up annualized gains averaging 23.7% in the five years ended in December.

This year, through July, his timing portfolio was down 5.4%, according to Hulbert Financial Digest, which tracks newsletter performance. Sullivan's been in, out and in the market again, trying to get a handle on it.

Typically, his average "buy" signal lasts 11 months, he said, but this year he got into the market March 17, not far from Nasdaq's peak; out April 17, near its trough; then back in May 17. Ouch.

"We're getting whipsawed, no doubt about it. We're having a really bad year," Sullivan said. "But if you have a methodology you have to stick with it. A lot of people spend their whole investment career trying in vain to find something that works."

Doug Fabian, publisher of Huntington Beach-based Maverick Advisor ([800] 950-8765; http://www.fabian.com; $199/year), has also been through a wringer. He flashed his clients a new "buy" signal a few days before the recent Nasdaq market peak in mid-July. His portfolio sunk 13.3% this year through July, after gains averaging 21.8% a year from 1995 through 1999.

This year's tremendous volatility appears to be upending many timing models, particularly those, like the Fabian strategy, that rely on prevailing market momentum.

The basic idea of timing is to take your cue from the market's flow--but what if the flow is shifting radically from week to week?

"The Nasdaq chart is a mess," said Alan Farley, founder of Hard Right Edge, a Littleton, Colo.-based Web site (http://www.hardrightedge.com) that teaches trading techniques. "It looks like someone simply threw mud on the wall."

Timers, of course, prefer pronounced market moves, either up or down; they want to ride the up waves, and--unlike buy-and-hold investors--be on the sidelines for the down ones.

So far this year, the market's ups and downs have given the overall impression of sideways movement--which is reflected in the Standard & Poor's 500 index's minuscule net change year-to-date.

As Fabian put it, "Trend following in a sideways market is tough. But we were whipsawed in 1990 and '94 before we recovered, and we'll snap out of it this time, too."

The market's internal dynamics have also played havoc with timers, as former tech-stock leaders have crumbled and sector rallies have flared, then quickly sputtered.

The trend can't be your friend if there is no discernible trend.

Most timers base their buy-and-sell signals on proprietary models that use various technical measures, such as momentum among major stock indexes, the advance-decline line (which compares the number of stocks moving up versus the number moving down) and stocks' intraday movements.

Many of their tools have arcane names such as Bollinger Bands, Japanese candlesticks, Elliott Wave and McClellan Oscillator.

Timers generally recommend model portfolios into which clients are supposed to shift their money when a "buy" signal is on.

These portfolios can include stocks, actively managed mutual funds, index or sector funds, exchange traded funds (which track the performance of an index or sector but trade like stocks) and cash, depending on how bullish or bearish the advisor feels.

The goal of all timers is to shift in and out of stocks at opportune points, minimizing bear-market exposure and maximizing gains. Some are far more trading-oriented than others, urging followers to jump in or out of the market monthly, even in normal markets.

"It's not surprising many market timing models are falling upon hard times," said John Bollinger, who runs the BollingerBands.com Web site (http://www.bollingerbands.com) and the Capital Growth Letter ([310] 798-8855; $112.50/year) based in Manhattan Beach.

"The trend models get eaten alive in this type of market, but that's the price you pay. The benefit is that they're going to be on the right side of the market's major moves, up or down."

The buy-and-hold crowd, however, argues that the payoff from timing isn't worth the hassle.

Charles Carlson, editor of DRIP Investor ([219] 852-3220; http://www.dripinvestor.com; $99/year), a Hammond, Ind.-based newsletter geared to long-term investors, contends that timers are, well, wasting their time.

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