Is It Possible to Time the Stock Market?

Is it possible to time the stock market? The holy grail of stock market trading is to know when to buy and sell, or in short, to time the market.

If you go to an Ivy League business school, you will learn all about how markets are efficient. That’s a fancy way of saying that there is no way to beat the stock market because all information has already been factored into share prices.

But anybody who has been around the stock market for a while knows that opportunities come along from time to time that offer traders the chance to pounce on deals.

Nobody exemplifies great investing better than Warren Buffett. But what does the Oracle of Omaha say about stock market timing?

Buffett Says You Cannot Time The Stock Market But…

Warren Buffett is a real conundrum for stock market timers. On the one hand, he claims it is not possible to time the stock market.

He advocates that most people simply squirrel away some savings and invest in the S&P 500 regularly over the long-term.

Yet, Buffett has famously timed the market well throughout history. For example, his purchase of Goldman Sachs and Bank of America at the depths of the 2008 crisis typified his stellar timing.

How did he do this?

The Warren Buffett indicator is a clue. This is a ratio of the Total Market Cap of all stocks to GDP. So how does this stock market indicator work?

How The Buffett Indicator Works

Warren Buffett has mentioned, though, that he often uses the ratio of the Total Market Cap of all stocks to the Gross Domestic Product (GDP) to help him determine when stocks are overvalued or undervalued.

Buffett’s indicator involves comparing the market value of all companies in the US stock market to the country’s GDP. 

Think of this indicator as having two components. The first is the stock market, which is a reflection of investors’ expectations of the future.

When expectations are high, the stock market trades at a premium. Equally when pessimism is prevalent, markets selloff, as they did in 2008-09 and in March 2020.

The second part of the indicator is GDP, which represents real economic activity.

You’ll see that Buffett doesn’t claim the ability to time the market but he did make big bullish bets when the Total Market Cap to GDP ratio was very low in 2008 and 2009 and equally held a huge cash position when the ratio was very high.

Before the stock market crashed in March 2020, Buffett held a massive cash position too. He may not claim the ability to time the market but he does believe when the Total Market Cap to GDP ratio is very high that expectations may be overly optimistic, and so he chooses to be more cautious.

When the ratio is very low, below 1, as it was in 2008, Buffett views the market as fearful, and follows his own advice to be greedy at such times.

That’s why he splurged. Within a few weeks he invested over $15 billion when everybody else was rushing to the exits to escape the stock market turmoil. He managed to score deals on favorable terms with prestigious names like Goldman Sachs (GS) at the time.

Stock Market Timing: Technical Indicators

Technical indicators are controversial at best. Two camps exist. Those that claim all information is built into the stock market and hence price is all you need to know. And those who claim technical analysis is for amateurs who don’t know how to analyze financial statements.

Wall Street analysts spend days crunching through financial statements to build financial models that value companies. This allows them to identify when share prices are “on sale.”

Technical indicators are more commonly used by investors who are not “institutional” nor “professional.”

But they can be valuable in the sense that they become a self-fulfilling prophecy. If millions of investors are looking at a 50-day moving average and have a rule to buy when a share price rises above it sell when a share price falls below it, the collective buying or selling itself can effect share prices.

Some of the most common technical indicators include:

MACD (Moving Average Convergence/Divergence)

A stocks MACD compares two moving averages of a share’s value. You get the number by subtracting the stock’s 26-period EMA from its 12-period EMA. You can learn how to calculate EMAs below.

Investors use MACD to determine when a reversal will likely occur. There are various patterns that often indicate when a stock’s price will change direction. Of course, the patterns don’t always predict the future.

When the 12-day line crosses above the 26-day line, a buy signal is generated while a sell is triggered when it crosses below.

Some traders swear by this indicator but no indicator is foolproof so trade in expectation that things could go wrong and you’ll likely be more cautious.

RSI (Relative Strength Index)

Ideally, a stock’s RSI can tell you whether the market is being too bullish or bearish. The calculations can get a bit complicated because they require a lot of division. You can make the job easier by using an online calculator.

If you get an RSI of 30 or less, then the stock is deemed undervalued, so you might want to buy.

If the RSI is moving below 70, a bearish signal is triggered. You can still make money from the stock, but it’s risky.

The rule of thumb is to avoid stocks with an RSI hovering around 50.

SMA (Simple Moving Average)

The SMA is one of the easiest technical indicators to calculate. You simply add the closing price of a company’s stock and divide it by the number of days. For example, if you want the SMA of Apple (AAPL) stock over a week, you would add the closing price for each active trading day and divide the amount by five.

A stock’s SMA can help you identify quick changes in share values. Since the SMA ignores fluctuations throughout the day, though, you may not have all of the data needed to make an informed choice. Still, you have more data than someone purchasing stock blindly.

EMA (Exponential Moving Average)

The EMA is similar to a stock’s SMA, but it gives more weight to recent prices than older ones. As the stock’s value changes over time, older prices have less importance than recent developments.

Many people trust EMAs more than SMAs because they consider the importance of recent activity more than older activity.

If the price changed suddenly within the last couple of days, you would see that movement in the EMA more than the SMA.

Are Fibonacci Levels Accurate In Stock Trading?

If you’re interested in the math behind the stock market, you have probably heard of the Fibonacci Sequence. The Fibonacci Sequence shows up all over nature, such as the number of petals in a flower and some snail shells.

The most basic version of the sequence is: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, … If you take any add any two adjacent numbers, they will equal the next number. For example, 8 + 13 = 21.

Some people have spotted Fibonacci Levels in the stock market. With stock market Fibonacci Levels, though, you divide numbers to determine the next one in the sequence. Whether you use the Fibonacci Sequence of Fibonacci Levels, you find the golden ratio: 0.618.

Symbolik and other leading technical analysis stock market sites have identified the power and unusual patterns of Fibonacci sequences that recur again and again.

Does Elliott Wave Theory Work In Trading?

Some traders swear that Elliott Wave Theory works. According to the theory, you can find long-term patterns formed from constant changes in the numbers and the influence of investor psychology. When it works, you can get close to predicting when a stock’s price will go up or down.

Elliott Wave Theory tends to deconstruct share price movements into cycles of 5 waves and within each wave further segments them into abc patterns.

For example, wave 1 might be up, wave 2 down, wave 3 is often the largest wave and continues in the same direction as the first wave. Then another pullback wave, called wave 4 occurs, before a final lunge upwards, called wave 5 exists.

Once wave 5 is exhausted, the market trend reverses and turns back down. 

Similarly after the market has moved in 5 waves down and reaches its exhaustion, it turns around and start to revert back higher.

Elliott Wave has been proven highly effective and some stock market timers swear by it. But it’s not always accurate and certainly open to interpretation.

Is It Possible to Time the Stock Market?

As you can see, there are plenty of ways that people try to time the stock market. Occasionally, they get lucky and make money from these strategies.

You cannot, however, rely on any strategy to game the system. There are too many unknowns and psychological factors that influence stock prices.

Instead of wondering, “Is it possible to time the stock market?” try to diversify your investment portfolio. Depending on your stage of life, you will want to balance risk with safe investments.

Risky investments tend to make more money when they work… but you can lose everything when they fail. A company with decades of reliable profits, though, adds stability that helps offset the risk you need to make money.

Take a calm, logical approach to investing in stocks. No system will benefit you more often than it lets you down. Otherwise, everyone would be rich.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.