Market timing

Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis. This is an investment strategy based on the outlook for an aggregate market rather than for a particular financial asset. The efficient-market hypothesis is an assumption that asset prices reflect all available information, meaning that it is theoretically impossible to systematically "beat the market." Market timing can cause poor performance. After fees, the average "trend follower" does not show skills or abilities compared to benchmarks. "Trend Tracker" reported returns are distorted by survivor bias, selection bias, and fill bias. At the Federal Reserve Bank of St. Louis, YiLi Chien, Senior Economist wrote about return-chasing behavior. The average equity mutual fund investor tends to buy mutual funds with high past returns and sell otherwise. Buying mutual funds with high returns is called a “return-chasing behavior.” Equity mutual fund flows have a positive correlation with past performance, with a return-flow correlation coefficient of 0.49. Stock market returns are almost unpredictable in the short term. Stock market returns tend to go back to the long-term average. The tendency to buy mutual funds with high returns and sell those with low returns can reduce profit. Institutional investors often use proprietary market-timing software developed internally that can be a trade secret. Some algorithms attempt to predict the future superiority of stocks versus bonds (or vice versa), have been published in peer-reviewed journals. Market timing often looks at moving averages such as 50- and 200-day moving averages (which are particularly popular). Some people believe that if the market has gone above the 50- or 200-day average that should be considered bullish, or below conversely bearish. Technical analysts consider it significant when one moving average crosses over another.