Simple market timing indicator says...

...hold / stay long / buy - for now at least. Over the weekend I revisited an update of a research document I read a while ago. It offers a Quantitative approach to asset allocation. Essentially this uses monthly data on total return indices and a simple 10 month simple moving average (SMA). The logic being that this roughly equates to the widely used 200 day moving average (based on roughly 20 trading days a month I guess). The simple bit is if the asset class closes the month above the SMA then you hold / buy and if it goes below you reduce /sell, ah the old trend is your friend adage.

 All the main UK indices are still above the 10 month SMA at the end of January 2014, phew - but need watching. It may be worth paying attention to as it has apparently worked quite well in the current volatile trading range since the 2000 peak with big draw downs being avoided. However, it did not work consistently in earlier decades (see appendix B of the above paper). It did do well in the volatile early decades of last century and in the 1970's. Other than that it didn't add value over buy and hold. I've never been a big fan of market timing because many have suggested that if you miss the best 10 days in the market then you crater your returns. Indeed research by Sandford Bernstein suggested that between 1926 and 1993 80 to 90% of the returns on shares comes in the best 60 months or around 7% of the time when the returns were 11%. In the other 93% of months returns were apparently 0.01% (Source: Quoted in The Little Book of Value Investing by Christopher H. Browne).

The paper at the link above discusses this in more detail and the authors of the above paper have also looked at these claims of missing the best days / months in this piece which argues you can benefit by being out of declining markets because they are more volatile and you also benefit then by avoiding the biggest down days too (which occur in down trends) and offsets missing the best days apparently. Seems to make some sense as avoiding losses is often half the battle. 

So I'll be watching it going forward from here to help me think about the overall positioning of my portfolio in an on going volatile secular bear type of environment that we find ourselves in. In fact I already de-risked my portfolio to an extent before the recent sell off. However, I don't think I'll adopt a full market timing approach given cost and tax implications and the past history of value and yield shares and the reinvestment of income tending to reduce the downside and speed the recovery of your portfolio. Plus I don't want to run the risks of being out of the market in recovery phases because as Christopher Browne said in his book above "It's a marathon not a sprint" and "It's time in the market, not market timing that counts." But at the end of the day I guess it depends on your time frame and your risk tolerance. 

Addendum
Just seen an update from the always entertaining marketoracle.co.uk (who I've recommended before) with his views on the latest sell off and the possible ways forward from here in the short term.