Can You Time the Market?

Momentum doesn’t equal easy money

You’ve probably seen the research on market timing. In short, it’s not a good idea to try to time the market—that is, to trade in and out based on whether you expect the market to be headed higher or lower.

But you may have also seen the research on momentum. It turns out that today’s stock market returns do, on average, predict tomorrow’s returns.

These two findings seem to be in conflict. If today’s returns can tell you something about tomorrow’s returns, then wouldn’t it be a good idea to time the market?

The chart below, from J.P. Morgan, helps answer this question. As you can see, short-term market returns tell you very little about where the market is headed over the longer term.

Very frequently, in fact, the market will dip 10% or more at one point or another during a year but still end the year in positive territory.

The bottom line: Yes, the market does exhibit momentum. But it is really more of a statistical phenomenon and difficult to profit from successfully. On balance, my view is that investors are far better off taking a buy-and-hold approach and not attempting to time the market.