There is a constant debate within the financial community as to whether or not it is possible to time the market and beat the S&P 500 along with the other major indexes over the long run. Many people side with the "efficient market theory," which concludes that stock prices always reflect the most up-to-date information available to the public. This theory compares buying individual stocks to gambling in a casino.
However, one of the greatest investors of all time, Warren Buffett, has singlehandedly rebuked this theory. Recent studies have shown that Buffett¹s yearly earnings have consistently trounced that of the S&P 500. This is due to his patience and his willingness to keep lots of cash on the side until the time is right to swoop into the market and pick up some great deals. You can be sure that in the current market conditions, with commodities soaring and financial sectors sinking, Buffett is silently picking away.
Here are a few tips for timing the market and building your own Berkshire Hathaway by timing your stock picks.
Follow the major indexes
Some of the most relevant timing information to keep track of while timing your stock picks is the current values of the three major indexes: the S&P 500, the Dow Jones Industrial Average and the NASDAQ. It's easier and more effective to use technical statistics such as historical charts and trading volume when trying to spot upward and downward trends in these major gauges than it is to track individual stocks. Since, in general, stocks trade within the flow of these indexes, when there is an upward spike in the market you can bet that most stocks will follow suit.You don't need to pick an absolute bottom to make timing your stock picks pay off. Early in March the major indexes hit their lowest point of the year. At that same time Boeing (BA) hit a new 52-week low. Since then, BA has steadily risen in tune with the overall market. If you only take into account BA as an individual stock this may seem like a random occurrence, but when you compare it with the S&P 500 you can see that the stock has followed the overall market during its peaks and dips. Keep this information in mind the next time the S&P 500 drops near its low for 2008. It is almost certain that BA will also fall, and the time may be right to buy.
Bad press can mean a good buy
Typically, when there is bad press about a major sector of the market (financial sectors, energy, retail or infrastructure) the news will pull down most of the stocks within the sector. Good companies and bad companies alike are sold off in the process, leaving plenty of deals to be found if you're willing to go against the grain. This has happened most recently in the financial sector, where billion-dollar write-offs and rumors of bankruptcy surrounding Citigroup, Bear Stearns Companies Inc. and Countrywide Financial overshadowed the modest gains and smart acquisitions from companies like Goldman Sachs (GS) and JP Morgan Chase.Back in November 2007, GS peaked at 250 points. By mid-March, it was trading near 140 at a 52-week low. In four months the stock had plummeted nearly 45%, even though it had minimal write-offs and had posted positive earnings. The company was mistakenly grouped into the same category as the other under-performers, and this association dragged the price down.
This would have been the perfect time to buy stocks in GS. Since announcing solid first-quarter earnings in March, GS has traded near 190, still well off of its 52-week high. This could still be a good value play, but it is no longer cheap.
Bet against the analysts
When all of the analysts covering a particular stock give it a "buy" rating it is safe to assume that you are late to the party and that it has already been bought up by the institutions, pension funds and money managers. Even though the stock is performing well and is loved by the public, this is the wrong time to build a position. Once all of the major market players have finished dumping their money into the stock there is little room for upward momentum, unless a significant event convinces the big players to increase their leverage. What you should look for are steady companies with great track records that have been downgraded by analysts to a "neutral," "perform," or even a "sell" rating. You can find this information on Yahoo! Finance.General Electric (GE) was recently downgraded because it failed to meet market expectations for its first-quarter earnings. It was severely punished by the market, dropping almost 10% that day. It was the greatest single-day loss the stock had taken in decades. Currently, GE is trading near its 52-week low, and this conglomerate is in a great position to climb back to its November highs once it is again in the good graces of the analysts. Two specific roadblocks to recovery for GE are its financial services, which were hit hard due to the credit crisis, and its ownership of NBC Universal, which analysts have been hounding GE to sell for years. With a significant 3.8% dividend, a higher yield than most money market funds, this stock is worth a second look. With lowered market expectations we should see a jump in GE when it posts second-quarter earnings.
play the market wisely
In order to take advantage of dips in the market you need to be aggressive when others are being passive and look to build your position while everyone else is trying to sell theirs off. It may seem counterintuitive at first, but remember that you should always be trying to buy low and sell high. It helps to put together a wish list of well-performing stocks that you would like to own. Actively track them and make sure that your money is never 100% invested. That way, when one of your favorite companies is unfairly knocked down, you'll be ready to strike with another perfectly timed stock pick.Resources:
http://en.wikipedia.org/
http://finance.yahoo.com/
http://www.dj.com/
http://www.nasdaq.com/
http://www.standardandpoors.com/
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