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12/17/2005
Book Review by Victor Niederhoffer: Timing the Market: How to Profit in the Stock Market

A book comes along about timing the market using the yield curve, technical analysis and cultural indicators and I hope fervently that it's not another version of the Beardstown Ladies' report of their successful trades without regard to their losses. I hope if the author makes calls that rely on calling the entire market, that the book will not retrospectively examine the market data and come up with a handful of buy and sell dates over the last 50 years that would have just happened to be coincident with the best times to buy and sell.

I hope that the author will not leave out the bad trades or fine-tune and restrict the buying and selling so that the rules are even more perfect than a retrospective attempt to pick such limited points from 50 years of data might be. I hope that the author will not base conclusions on data that are no longer relevant like P/Es below 5 or the DJIA below 100 that Graham and Buffet or Stein like, or VIX above 30, or 10-year bond yields above 10%.

I hope that the author will not recapitulate a history of financial speculation based on secondary sources reminding us that there were booms in stocks in France and England in the early 18th century or excesses in tulips in the 17th century to fill the book out.

I also hope that the authors will take into consideration such things as the uncertainty of their conclusions, the consistency with randomness and the likelihood that rational people who are aware of the general relations adduced might change their behavior in the future. A book from this publisher might even be expected to understand how the principle of ever-changing cycles might mar or damp any conclusions about fixed ways of making money, since several of their books treat this topic extensively.

I also hope that the author will at least have learned something from the emphasis that modern authors have placed on the difficulty of overcoming the positive drift in the market with short sales, and the absurdity of trying to beat dealers with much lower transactions costs than yourself at zero sum game activities.

Finally, barring all this I hope that the author will at least motivate the conclusions and approach within the framework of the kind of microeconomic or macroeconomic theory taught at all good colleges in their elementary economics classes.

I was therefore sorely disappointed in Deborah Weir's Timing the Market: How to Profit from the Stock Market (Wiley: November 2005), regrettably part of the Wiley Trading Series, as it contains all these defects.

There are two good parts of the book: an appendix that contains monthly data on the three-month bill and ten-year note, with corresponding S&P 500 Index data from January 1961 to January 2004. The author reports profits and losses from a blind rule of buying when the three-year is below the ten-year and selling when it's above. Regrettably she leaves out the sell that would have occurred on November 1969, the update of her results for the loss from buying the S&P on January 2001 at 1320 and holding through the decline to the 780s in 2002 and the four years without profit as we write. She also fails to note that all the inversions since 1966 came with 10-year bonds above 5% as follows:

	Inversions (10-year note yield above 3-month bill yield) 
         Date        10-year yield       S&P level
         Sept 1966         5.2               77
         July 1969         6.7               98
         June 1973         6.9              105
         Dec  1978         9.0               95
         Nov  1980        12.7              106
         Aug  2000         5.8             1430
	
The date she reports are from a Federal Reserve site and presumably on that site the Fed reports how and when during the day or month the yields were calculated and whether they are adjusted in some retrospective way.  I eschewed using all such series for many years because they turned out to be based on averages and intraday prices rather than level and end-of-day prices) like the useless retrospective P/E statistics that the doomsday people use.

You might think that a sapient author might have considered that a rule that only gave one sell in 20 years and then was superseded by a buy on Jan. 1, 2001, when the market was at 1320, right before one of the greatest crashes in history, without one further sell, might not be overly useful or relevant. Also that with 10-year yields during her points of inversion averaging some 80% above the current levels, that the conditions and utilities today might be different from the past; but no, such reflection is not made. Instead there are some references to ripples in the term structure from three-month to one-year that the author would have used in retrospect to fine tune the six sell signals she reports to make them even better.

There is an interesting table of monthly bust, waist and weight sizes of Playboy playmates from 1960 to July 2004 that illustrates the descriptive coterminous correlation that during good economic times busts become bigger but during bad times busts below smaller and more caring providing and less circular cleavage styles become in vogue. However, even the author seems to know that her use of the data is "designed to entertain rather than to forecast."

Perhaps the author of this book, a NYU business school graduate after her schoolteaching days ended, will learn from all the gaps and weaknesses in her book and will not be visited with the same fate in posterity as the Beardstown Ladies. 

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