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A market timing model combines different indicators to provide a more flexible approach to analysis by allowing for bullish or bearish moves to occur in different environments. Indicators used for models run the gamut and include the following tools:

1. Technical (including sentiment and breadth),
2. Economic (including inter-market) and/or
3. Fundamental.

By blending indicators from different disciplines, the trader is alerted to the potential for a market reversal even if a signal is delayed with the individual’s primary form of analysis.

Market timing models can be used as a money management tool signaling periods to cut back or add to positions. New countertrend positions may also be established when changes are first signaled, which can then be transitioned to more fully invested trend positions once the new move is confirmed.

This all sounds great in theory, but clearly creating a model that suits your needs requires a good deal of work. It’s not a simple matter of identifying 7 key indicators and blindly investing or trading when different indicator values pop up. That said, the work is worth the effort when you develop a tool that provides unbiased information about conditions supporting bullish, bearish or neutral markets.

Getting Started

There are two nice first steps when creating a market timing model:

1. View existing models and identify common tools and themes
2. Identify conditions you feels are key for certain types of markets to develop or persist

Considerations for the first step are covered here and the second step will be explored in a second article.

Ned Davis Research [NDR] is an institutional research entity that is often referenced by different analysts and traders when they are discussing their model tools. Two books discussing NDR approaches include The Research Driven Investor, by Timothy Hayes, CMT, and Being Right or Making Money, by Ned Davis. Both of these are somewhat expensive, but may be available to you from your library.

Although the title is a touch older, Martin Zweig’s Winning on Wall Street provides specific models used by Zweig, along with analysis of the different indicators that make up the model. A fourth choice to consider is Nelson Freeburg’s Timing Models and Proven Indicators for Today’s Markets from Marketplace Books which summarizes a few different models.

Setting Up an Existing Model

Setting up and monitoring an existing model is a great exercise that forces you to get your data resource ducks in a row and comfortable using a platform for analysis (i.e. Excel). Reliable data is a critical component of any model and the process will highlight things for you such as how to deal with delayed or revised numbers, and the extent to which you’re willing to regularly hunt down certain figures. The model is only as good as its inputs and if you have 4 indicators with easy access to reliable data, you don’t want to blow the model with a 5^th indicator that’s extremely cumbersome to track. If necessary, create a similar alternative measure you’ll use.

Whenever you monitor indicators from an existing model, be sure to consider whether there are any structural changes in the market that could impact the indicator’s effectiveness going forward. For instance, the New York Stock Exchange Composite Index [NYA] is often used for breadth measurements. Since the index construction has significantly changed in terms of the types of securities used, you may need to revise key alert levels, modify the specific breadth measurement you use or consider a different breadth measurement.

Developing your own market timing model is somewhat of a lengthy process that can only be completed by just starting somewhere. When using indicators from other trader’s models, be sure to view past performance after setting them up to be sure they are input correctly and to verify the efficacy of the tool. Next, monitor the indicators going forward to determine if any structural changes in the market has impacted more recent performance. Both of the steps will deepen your understanding of the tool and give you more confidence in it – something that’s critical when you want to put it into action.

To access other articles written by Clare White, please click here.

Clare White
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
Questions for Clare? Visit the Optionetics.com Discussion Board

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