The Stock Market Timing Guide

In this post, we will be focusing on the stock market timing guide. Many people have debated over this issue since the emergence of the stock market. On one side, we have the value investors (the father of value investing was Benjamin Graham and is championed by Warren Buffett, the most successful of value investors and the CEO of Berkshire Hathaway) who did not believed in the concept of stock market timing guide. On the opposing side, we have the speculators (made famous by traders such as Gerald Loeb and is championed by William J O'Neil, a very successful trader in his own right) who believed that one can predict the market tops and bottoms with a certain measure of accuracy through daily and acute observation of the stock market movement.

So who is right? It is important to note that there have been value investors and traders who have made a lot of money using either ways, hence there is no right or wrong here. I mean, as long as you can make a lot of money, who cares right? Do choose a strategy you are most comfortable with. However, after having observed the stock market for some time already, I feel that concept the stock market timing guide does make sense to me and I have been able to stay out of some hairy situations since (A good example will be the recent bear market in 2010... on the overall I am net positive for the year from shorting the market).

What is the stock market timing guide all about? Essentially, the stock market timing guide is used to monitor any tops and bottoms that have occurred to signify the end of an uptrend as well as the beginning of a downtrend and vice versa. If we are able to do this, we will be able to stay out of buying stocks in a bear market and shorting stocks in a bull market. Thus, by swimming with the tide, we have a much higher chance of making money in the stock market.

Before we can elaborate on the stock market timing guide, let's go thorough some basic terminologies:

1) Accumulation - stock market goes up strongly with volume of stocks traded higher than average

2) Distribution - stock market goes down strongly with volume of stocks traded higher than average

The key to the stock market timing guide is to monitor the number of accumulation or distribution days within a certain time period, say six weeks or so. If the number of distribution days start to add up in an uptrend within this period, it signifies that the institutions are unloading stock and it might be time to sell shares also. This is a sign of a topping market as a number of distribution days can easily kill an uptrend and send the stock market into a correction mode. Conversely, if the number of accumulation days add up in a downtrend, the it signifies that the institutions are buying stock and it will be a wise choice to buy along with them as well so that the institutions can continue to push up the value of the stocks that you own. When the number of accumulation or distribution days add up, the stock market timing guide is providing a somewhat clear signal of what is going to happen.

In the event that the a series of distribution days are noted within a certain time period in a downtrend, it means that the current trend is strong. Similarly, when a series of accumulation days are noted within a certain time period, it usually means that the uptrend is still strong.


A caveat to the stock market timing guide: if the stock market is going insanely higher with strong volume within a very short period of time, it may signify a climax run. This happens when stock market participants become illogical and start buying stocks under the latest fashion they see. (A good example will the recent "dot com" craze that drove the NASDAQ to over 5000 points and back down again). Eventually, the buying power is exhausted and the stock market starts to top. It is at this time you will notice that the volume shrinks as well as all the potential buyers have bought and this should give you another indicator to escape with your winnings before selling starts to take over.

Do take note of the following:

1) Applying the concept of the stock market timing guide does not mean you will make a lot of money every time you invest/trade. However, it does help to reduce risk and hence you will save quite a bit from not losing money in the first place.

2) By using the stock market guide, we are attempting the determine the current health status of the stock market and not to predict what the stock market will do six months to one year from now. Remember that no one can accurately call the exact market tops and bottoms and hindsight is 20/20.

3) The stock market timing guide is not a buying and selling system by itself. Rather, it should be included in a part of your trading system where it is one of the factors to be taken into consideration.

It is always good to see numerous accumulation and distribution days happen as it means that there will be a change in trend and my buying / selling system can take advantage of it. As long as there is a strong trend, it is safer to invest/trade as you will not be swimming against the tide.

Using the stock market timing guide can involve a bit of work every day as you need to monitor the stock markets closely. Once you see the red (or green) flags, do not hesitate and take action accordingly.

I hope the concept of the stock market timing guide has been useful to all you beginners out there. If you truly wish to be a great trader , taking this first step of observing the daily stock market movement is the key to success.

Tags: stock market, investing, trading, make money, stocks, finance, wealth building, stock market basics, stock market timing guide