Should you try to ‘time’ the market?

July 29 - After a painful plunge on fears of widespread bogus accounting and widening corporate scandals, the stock market is now surging — with the Dow leaping 1000 points in the last five sessions. Will the rally continue? Should you even try to pick the bottom? With adherents of “buy-and-hold” investing still wincing from the recent raging bear market, the idea of “market timing” is winning renewed attention.

CONVENTIONAL WISDOM on Wall Street holds that market timing is a fool’s game. Trying to move your money in the market before it rallies and out before it declines, according to this view, requires a crystal ball that just hasn’t been invented.

“The person who can tell you infallibly when we’re at the bottom or the top has not yet been born,” long-time market watcher Louis Rukeyser told his CNBC viewers Friday night. Still, just as “trees don’t grow to the sky,” he said, “submarines don’t dive to the center of the earth,” and many market watchers “think a bottoming process is now truly underway.”

In fact, after what turned out to be one of the biggest bubbles in the history of the U.S. financial markets, some market watchers think stocks are now hitting a bottom of historic proportions, including market strategist and historian Don Hays.

“The evidence is pretty overwhelming that the conditions you reached in the last 6 weeks have only been reached in a couple of time in U.S. history — 1932, 1974, 1982 — which were some of the best times in the U.S. markets,” he said.

That view helped propel Monday’s continued buying stampede, as investors sent the broader markets higher on fairly heavy volume.

During the Great Bull Market of the 80s and 90s, investors learned to simply “buy on the dips” and not worry about broader market cycles. Now, after a two-and-half-year slide has reintroduced the concept of a long-term bear market, market timing — the strategy of getting out at the “top” and back in at the “bottom” — is coming back into favor.

But it’s an investment strategy with only limited usefulness, according to A.G. Edwards market strategist Al Goldman.

“The only thing I think we can say with credibility is that we made a bottom,” he said. “Whether or not it was the bottom, nobody can answer.”

One of the biggest arguments against market timing is that mistakes can be costly. Though the Standard & Poor’s 500 index returned 13.26 percent over the past 10 years, if you missed the six best months in that period your return would have been only 8.29 percent, according to Barker French, Chief Investment Officer at Brinker Capital, a money management firm outside Philadelphia. Over the past 75 years, he says, the 62 best months returned about 11 percent per month; the remaining 838 months had an average monthly return of just 0.2 percent per month.

“Clearly timing doesn’t work,” he wrote in a recent note on the firms’ Web site.

But market timers say that argument has an important hole in it.

“What they fail to tell you is if you’re out of the market in, say, the 5 worst months, you did better, said Peter Eliades, editor of the Stock Market Cycles newsletter. “It’s a bad argument to use, but a lot of people fall for it.”

The Dow Jones Industrial average topped near 1,000 five times before breaking through that milstone for good -- a process that took 16 years. (Data provided by CNBC on MSN Money)

Market timers like Eliades also note that “buy and hold” investing doesn’t work very well in a long-term bear market, like the period between 1966 and 1982, when the Dow topped out near 1,000 five times before breaking through that milestone for good. Given the scope of the recent market bubble, Eliades believes it could take a decade before the Dow sets new highs again.

“In 1929, when we topped out at 382 and came down to 40, we didn’t see the 380 level for another 25 years,” he said.

Despite the recent rally, few long-time market watchers are willing to predict that another long-term bull market has begun. And many gun-shy investors seem unlikely to believe them if they did. That has many investors ready to hit the “sell” button at the first signs that the current rally is running out of steam.

Some analysts also caution that stock prices may have to fall below their recent trough before another long-term bull market can begin. Eliades, who says he’s got his money in cash until the market shows clearer signs of its next move, is among the most pessimistic of that camp. He thinks the Dow could hit 3600 in the coming decade.

Even if you’re not that pessimistic, investment advisors suggest you still need to pay attention to the markets ups and down. Proponents of “buy and hold” investing say it never meant ignoring market conditions — you still need to be selling stocks that look overvalued and buying those that look cheap.

“You don’t put [stocks] in a safety deposit box and forget about them,” said Goldman.

And even money managers who say they don’t believe in market timing often use strategy know as asset allocation — periodically raising and lowering the portions of a portfolio invested in stocks, bonds and cash. To cycle-watchers like Eliades, that strategy sounds familiar.

“If you’re doing asset allocation between equities and cash, in effect what you’re doing is market timing,” he said.