Wisdom from a Top Market Timer

07/15/2013 9:00 am EST

Focus: STRATEGIES

Sy Harding of the Street Smart Report has had success with his simple twists on age-old market timing strategies, and here he explains some of his methods and how they apply to the rest of 2013.

Steven Halpern: We're here today with Sy Harding, editor of the Street Smart Report. Thank you for joining us, Sy.

Sy Harding: Happy to be with you, Steve.

Steven Halpern: The prestigious Timer Digest Service, which monitors the buy and sell signals of leading market timers, ranked you as the No. 1 gold timer for 2012, as well as the No. 2 long-term stock market timer. Congratulations.

Sy Harding: Thank you.

Steven Halpern: Let's look at gold first. Your gold timing model has been on a sell signal since last October, and I recall you had forecasted at that time that gold prices could drop below $1,300 by this summer, which has happened. Now that that's occurred, are you ready to turn bullish, or do you still see downside risk?

Sy Harding: Well, my indicators remain on last October's sell signal. I've had to keep dropping my downside targets-my initial targets. The support levels broke each time, and most recently my target at $1,300 broke.

We're looking now at probably a low around $1,100. However, we are in a situation with gold where we have to be looking for a potential buy signal, at least for a bear-market rally.

Gold has already dropped 35% since its peak at $1,900 in 2011. My intermediate-term technical indicators have become quite oversold, and gold itself has become oversold again beneath its short-term 30-day moving average. But it's also oversold beneath its intermediate-term 30-week moving average.

Sentiment, as we know, has become very bearish for gold, and seasonally we're coming into the three-month period of July, August, and September, which tends to be the most positive three-month period for gold a lot of the time.

So I'm not ready to jump the gun on my indicators, but I am looking for the potential for a buy signal for at least a bear-market rally. Right now, I'm still sticking with the sell signal.

Steven Halpern: OK. Turning to the stock market, you have a proprietary strategy that's based on seasonal patterns. Could you explain this approach to our listeners?

Sy Harding: Sure. It's similar to the "sell in May and go away" strategy that's been around for an awful long time, but in 1999 I was looking for a strategy that would let me and my subscribers continue to participate in that strong 1990s bull market with something that would also get us through the serious bear market.

I expected it was right around the corner when that market bubble burst, and I researched a lot of possibilities. And the market's long-term pattern of seasonality showed considerable promise.

"Sell in May and go away" was already well known as a strategy that at least matched the market's performance over the long term, and it called for mechanically buying on November 1 each year and selling on May 1.

My research found the best day to buy was most often October 16, and the best to sell was most often April 20...but it was also obvious that the market doesn't launch into a rally on the same day each fall and into a correction in the spring on the same day.

So I combined the short-term technical indicator, the MACD, with the seasonal pattern, with the rule that if MACD was still on a sell signal when October 16 arrived, the entry would be delayed until MACD triggers its next buy signal. And in the spring, if MACD is still on a buy signal when the exit signal of April 20 arrived, the exit would be delayed until MACD triggered its next short-term sell signal.

It made a dramatic improvement: rather than the fixed six months favorable season of sell in May, the favorable seasons under my system vary between five and seven months. That has resulted in more than doubling the performance of the market.

The sell in May strategy, at least since I introduced it in 1999-and that's been confirmed by Mark Hulbert's Financial Digest-it takes only 50% of market risk, and avoids most of the market's corrections.

Steven Halpern: So based on that indicator, you are now out of the market?

Sy Harding: Yes, our last entry was November 26, which nicely avoided the October and November sell-off last fall, and the exit this spring was on April 22. The jury is still out on whether that's going to work out or not. It doesn't work every year.

It works over the long term. The most important thing to realize is that all seasonality is saying is that the market will probably be lower at the entry in the fall than at the exit in the spring. It doesn't mean that a correction must begin in May; in fact, over the years most often the low has taken place in October.

Steven Halpern: Now also, in addition to this seasonal pattern, you also look at one that's a four-year pattern that's known as the presidential cycle. Could you explain the logic behind this, and what you think it means for investors now that we're in the first year of this four-year cycle?

Sy Harding: Well briefly, the four-year presidential cycle has been around for a long time, has been known about for a long time.

Basically, the market tends...if there are going to be problems, they usually take place in the first two years of a new administration; the first two years of the four-year cycle. That gives the administration plenty of time to pull out all the stops and get the economy and markets booming again in time for the next election.

It also is a pattern that doesn't happen all the time, but it happens often enough that it has become quite pronounced. And as you say, we're now in the first year of the current four-year presidential cycle, and I'm a little bit concerned about it this year, because this time there are a number of potential problems converging at the same time.

Over the last 110 years, there have been 25 cyclical bear markets-one on average of every 4.4 years. The current bull market has been underway for more than four years, so it's getting long in the tooth, and at the same time the S&P 500 has rallied back to its peaks of 2000 and 2007; fractionally above, in fact.

And if we're still in a secular bear market, and I believe we are, that puts the market in jeopardy of being near a significant top, gauging from that long-term pattern.

Meanwhile, we've got potential catalysts to bring the market down. A list that seems endless: Anemic global economic recovery seems to be stumbling; deteriorating earnings; the drag on the US economy from cuts in federal spending being imposed by the sequester; the need for the Fed to dial back and eventually reverse its unprecedented monetary policy; the ongoing recession in the Eurozone; and so on.

So we are in the first year of the four-year presidential cycle. If there are going to be problems, they usually take place in the first or second year or both. And these other patterns that I mentioned-still being in a secular bear market, and the current bull market having been underway already for more than four years-I think it raises the risks considerably for this year and next year.

Steven Halpern: OK, but that won't be of concern for you right now, because your other seasonal indicators for now are keeping you out of the market.

Sy Harding: Yes, until probably about October.

Steven Halpern: Okay, thank you very much for your time.

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