Market Timers Rise From the Crash’s Rubble

Shon Saleh avoided the Great Crash of ‘87, thanks to a case of perfect timing.

In early October, the San Francisco stockbroker planned to invest heavily in stocks. But before doing so, Saleh called a phone hot line, which said the outlook was bearish and advised him to stay out of the market. He did, saving himself and many of his clients from the ensuing Oct. 19 crash.

“I could have lost a hell of a lot,” a relieved Saleh said. Instead, “I was very calm as the market was collapsing.”

Saleh’s timely phone hot line tip was courtesy of Peter G. Eliades, editor of a Los Angeles newsletter called Stockmarket Cycles and one of a rough-and-tumble breed of stock forecasters known as market timers. Following volume and price trends and other often arcane technical data, timers try to pinpoint, sometimes to the day or hour, short-term shifts in the market.

Last month’s market crash, and the ability of some timers such as Eliades to correctly tell their clients to sell stocks before the collapse, has given many timers new attention and adulation that they may have lacked when stocks were rocketing upward during the 1982-87 bull market. Many who had their clients out of stocks before the crash have seen their client lists and media attention increase markedly.

“A bull market is not when you need a timer . . . you need a timer to warn you when to get out,” said Robert R. Prechter, editor of the Elliott Wave Theorist newsletter in Gainesville, Ga., and the most widely followed timer today.

“It always takes a bear market for market timing to come into its own,” said Robert James, editor of Timer Digest, a Fort Lauderdale, Fla., newsletter that rates timers’ forecasting records. “It was hard to convince people during the bull market that they should pay attention to timers” since stocks were mostly going up and there were few sustained corrections.

But while timers are enjoying the spot light, they also wonder how long that attention can last. Many worry whether their popularity can be sustained if the bear market persists.

“The market newsletter business dies in a bear market. People just lose interest,” James said.

Timers also may face renewed skepticism about their work and effectiveness.

Skeptics, including many pension fund managers and other stock analysts, contend that many timers’ success is as much a result of luck as skill. Half of the timers ranked among the top 10 by one widely followed rating service were bullish just before the big crash, and they and others have been wrong on other critical occasions as well, these skeptics say. And even the timers who were bearish before the crash failed to foresee anywhere near a collapse of the magnitude of Black Monday’s 508-point massacre, skeptics note.

Pension fund managers generally don’t use timers and timing because “they think it just doesn’t work,” said Lawrence E. Davanzo, general partner in charge of pension consulting for Wilshire Associates, a Santa Monica investment research and consulting firm.

Judge the Long Term

Many financial advisers also contend that average long-term investors who can’t follow the market on a daily basis should not use timing because of its added risks and costs. They are better off with a simple buy-and-hold strategy, partly because timers’ fees can be expensive, these advisers say. Also, frequent switches in and out of the market can add tremendously to commission costs and create unwanted tax liabilities because capital gains are taxable each time stocks or mutual funds are sold.

Timers, however, contend that even investors who buy and hold can benefit from some active timing. Buying and holding is a far riskier approach than making some attempt to shift out of a market near a peak and miss a long decline such as the one between 1968 and 1974, when the typical stock lost 80% of its value, contends Gerald Appel, a timer and editor of Systems & Forecasts, a newsletter based in Great Neck, N.Y.

Timers also say that criticism of their work overall is unfair. While some of the best make short-term mistakes, their record must be judged over a long period of time. The best ones make more correct calls than mistakes.

“The proof is over a cycle. You’ve got to go over a bull and bear market; then you can see who did a good job,” said Martin E. Zweig, a prominent timer and editor of the Zweig Forecast, a newsletter based in New York.

“Every timer is not the same,” said Stan Weinstein, another leading timer and editor of the Professional Tape Reader in Hollywood, Fla. “Not everybody who picks up a paintbrush is Picasso. Some are going to do better than others.”

To be sure, this is not the first time that market timing has been in the spotlight. Timing gained a lot of attention in January, 1981, when outspoken and eccentric timer Joe Granville touched off a one-day selling panic by advising investors to “sell everything.” But his popularity and credibility waned after he missed the bull market that started in August, 1982, and after he made wild predictions about earthquakes and other non-market phenomena.

Lately, Prechter of the Elliott Wave Theorist has gained so much influence that his sell signal on Oct. 5 was widely blamed for contributing to a then-record 91.55-point drop in the Dow Jones industrial average the following day.

Costs Vary

Market timing is as old as stock investing itself. Indeed, everyone who manages money or plays the market is a timer of sorts, since the ultimate goal of timing is to pick the starts of rallies for buying and the starts of downturns for selling.

Many professional money managers attempt long-term timing for their portfolios. For example, a number of managers of stock mutual funds began reducing their exposure to stocks as early as last spring, worried about a possible sharp correction or bear market. Some mutual fund managers, such as Richard Fontaine of T. Rowe Price Capital Appreciation Fund, had as much as 80% of their portfolios into cash by the time of the crash.

But the most widely followed--and controversial--timers are independent newsletter editors who try to identify the beginnings of short-term swings in the market and provide specific buy and sell signals accordingly. They average about six of these signals each year, but some give as many as 20, Timer Digest editor James said.

Timers usually distribute these instructions through their newsletters and through telephone hot lines that in some cases are updated as often as five times a day. Costs for these services typically run between $150 and $250 a year, including hot-line privileges, but some run as high as $1,000, James said.

Many individual investors use timers’ advice to decide whether to switch in or out of stock mutual funds rather than individual stocks. Some timers also manage mutual funds and other investment portfolios.

Most timers are so-called technical analysts who rely on indicators such as volume and price trends, cyclical patterns in trading, and other measures of supply and demand and investor psychology. They generally pay less attention to so-called fundamental indicators such as corporate earnings, company balance sheets and interest rates.

Prechter, for example, bases his timing forecasts largely on the Elliott Wave Theory, which posits that markets follow predictable “waves” rooted in human psychology, alternating between pessimism and optimism.

Eliades, whose recent bearish forecasts had nearly as much influence as Prechter’s, bases his prognostications largely on theories that markets follow certain predictable cyclical patterns.

The growing prominence of Prechter, Eliades and other timers has helped raise interest in technical analysis and the view of its proponents that markets are driven largely by investor psychology rather than discernible events such as sharp changes in interest rates, economic policy, corporate earnings and the like.

“Market timing has nothing to do with day-to-day events,” Eliades said, espousing the view of technical analysts that most major market moves, including the Oct. 19 crash, cannot be traced to any group of events. “It just comes down to the psychology of the investor.”

No one knows for sure how much influence these timers have, but it is clear that the better-known ones have influence far beyond their modest subscriber lists. Some money managers and stockbrokers base investment decisions, in part, on timers’ views.

Some investors wish they had followed timers’ advice more fully. Dallas engineer Guy Redmond said he only sold one-third of his stocks in early October following sell signals by Prechter, Eliades and other timers. “What I did was a compromise,” Redmond said. “Sure, it would have been great if I had sold half or all of my stocks.”

Besides Prechter and Eliades, another widely recognized timer is Robert Nurock, editor of the Astute Investor newsletter based in Paoli, Pa. His following has been enhanced largely due to his frequent appearances as a panelist on the “Wall Street Week” public television show. The show’s technical market index, which for many investors is their only exposure to the often esoteric calculations of technical analysts, is compiled by Nurock.

Understandably, the competition and rivalry between timers for recognition is intense.

“Prechter and I are friends, and we do seminars together,” Eliades said. “But there’s nothing he’d rather do than to beat me, and there’s nothing I’d rather do than to beat him. It’s a dog-eat-dog world.”

But as the rise and fall of Joe Granville illustrates, a timer’s influence can be fleeting, often lasting only as long as he continues to make correct calls--and only as long as those correct calls are recognized. That often leads timers to resort to exaggerated claims of their prowess--often after the fact.

Rating Services Key

“Everybody’s now claiming they did a pretty good job” in getting clients out of the market before the crash, says Mark J. Hulbert, editor of the Hulbert Financial Digest, a Washington newsletter that tracks timers and other stock newsletter publishers. “But none actually predicted the 508-point drop, although some had their subscribers better situated than others.”

To enhance their recognition, many timers strive to get on the top 10 lists of such newsletter rating services as Timer Digest or the Hulbert Financial Digest. Getting on those lists can mean hundreds of new subscribers and guest appearances on such influential shows as “Wall Street Week.”

So seriously do some timers take these rating services that they sometimes contest the results. Eliades, for example, is taking Hulbert to arbitration over a study by Hulbert showing that only one of 14 timers tracked--Prechter--was able to beat a buy-and-hold strategy between January, 1985, and August, 1987.

Eliades, however, says that some of his timing moves were incorrectly measured and that he too beat the market. (Hulbert admits that it’s difficult to beat a bull market that has few major corrections, as was the case in the 1985-87 period studied.)

Clearly, however, having a correct bearish call before the Great Crash has outweighed many past mistakes.

Many of the timers who were fortunate enough to issue sell signals before the crash are now enjoying added subscription business. Heinz Petzold, editor of Petzold on the Market, a newsletter based in Torrance, has seen his subscription list jump to about 300 from 250 before the crash, thanks to his sell signal in early October and the recognition since.

Other timers who had their followers out of the market before the crash include such gurus as Zweig of the Zweig Forecast and Weinstein of the Professional Tape Reader.

“Business is terrific. It’s been great since the crash,” said Zweig, noting that his subscriptions and television appearances have risen sharply since Black Monday.

But others were not so fortunate.

James of Timer Digest contends that five of the timers on his top 10 list before the crash did not give sell signals in time to get their followers out of the market, prompting James to knock them off his elite list. Those ill-fated prognosticators, James said, include Nurock of “Wall Street Week” fame (although, given his strong past performances, “he’s is still not going to look that bad,” James said).

The most controversial call, however, was from the timer superstar, Robert Prechter. On a bulletin dated Oct. 15, the Thursday before Black Monday and a day before the Dow industrial average recorded its first 100-plus point drop in history, Prechter gave his Elliott Wave Theorist subscribers instructions to buy as long as the Dow had not fallen below 2,170 and to sell once it did (it closed on Oct. 16 at 2,246.74).

Corrections in Forecasts

Fortunately, however, most of Prechter’s subscribers probably didn’t get their mailers until the Black Monday rout was well under way. Also, by the time of the opening on Black Monday, the Dow was well below the 2,170 level anyway, Prechter notes.

Prechter thus contends that even if any of his subscribers had received the bulletin earlier and followed it, they would have gotten out early in the Black Monday free fall. Or if they had bought mutual funds that day, their shares would have been priced at the close of trading that day, as is the normal practice for mutual funds.

However, others don’t see it that way. “Prechter just lucked out,” one competing market timer said. James said the incident forced him to remove Prechter from his top 10 list, which Prechter had been on continuously for five years.

Prechter also suffered a setback in another way. Until the crash, he had been calling for the Dow average to reach 3,686, give or take 100 points, sometime in 1988 before the end of the bull market. Now, however, Prechter says such a level won’t be achieved since the bull market is over.

Critics point to such incidents--and the fact that half of Timer Digest’s pre-crash top 10 timers were incorrectly bullish before the crash--as just more evidence of the folly for small investors to rely on the advice of timers.

While some timers correctly were bearish before the crash, that can be expected out of mere probability. There always are going to be some forecasters who are bearish and some who are bullish, said John Markese, director of research for the American Assn. of Individual Investors. “There’s always going to be someone who was right,” he said.

Small investors, Markese said, should not try to time the market. “You should be accumulating shares and have a long-term viewpoint.”