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There is a gross misunderstanding about the use of timing in investing. The simple fact is that ANY analysis intended to optimize return on an investment is a form of timing. Every investor wants to enjoy an increase in value over time, regardless of the time frame of the investment; therefore, most investors employ some sort of research process, the purpose of which is to insure a good return.

Good timing is a goal toward which every investor strives. In this article I will describe in general terms how timing can be used and illustrate that timing is not a monolithic process at which aspersions may be cast or about which wonderful claims can be made. Most importantly, I will describe in broad terms how the timing aspect of investment decision making can be approached in various investment arenas.

Fundamental Analysis (FA) is a form of timing. No one buys a stock on the expectation that it will be worth less in the future, and the fundamental analyst looks for stocks with good fundamental value in terms of what is currently known and what is expected in the future. A stock is bought when the expectation is that the stock will be worth more at some point in the future. A stock is sold when the expectation is that market value will deteriorate over time.

Since FA does not consider the actual trend of the stock price within the time frame of the investment, it is a lousy timing tool when used by itself. But it is, nevertheless, a rudimentary attempt at timing, and is useful as long as one understands its limitations.

On the Technical Analysis (TA) side of the fence, there are many ways to employ timing. In fact, that is the primary purpose of TA, to optimize the entry and exit points on investments. TA can be employed without the use of FA, but, generally speaking, for intermediate and long term investments I think it is best to use FA to identify good value and TA to identify and execute the best entry and exit points.

It is not my purpose to cover the myriad of technical tools available -- it is up to everyone to find the tools what work best for them -- but I do want to cover the broad categories of where and how technical timing might be used. The first is market timing.

MARKET TIMING
Market timing is based on the fact that, in general, about 80% of stocks will follow the direction of the broad market, so you would want to be out of stocks and mutual funds when the market is going down, and in when the market is going up. In the strictest sense you would move in and out of the market based on your perception or prediction of market direction; however, as a practical matter it is my observation that this won't work that well except in very narrow circumstances.

There are specialized mutual funds that track market indexes. If you are using one of these mutual funds, market timing will probably work well, depending on the timing methodology. Also, trading certain index options and futures will require some kind of market timing awareness to be successful.

Otherwise, market timing and market projections are only useful in providing a first step in a top down analysis and timing process which recognizes that overall market direction has a strong influence on the movement of individual securities and is, therefore, an important consideration in reaching a decision regarding entry and exit points for a specific security.

Having said that, I want to emphasize that the most important and always overriding consideration in buying and selling is the price movement of the security itself. It matters not that the market is heading straight up if your stock is heading straight down. Conversely, why should you sell a stock that is making new highs in the face of a severe market decline? Market analysis tells you if the investing environment is likely to be friendly or hostile, but you don't own the market, you own stocks and mutual funds. You must manage what you own.

TIMING STOCKS AND INDUSTRY GROUPS
Within the broad stock market there are smaller subdivisions -- market sectors, representing broad areas of the economy (energy, services, capital goods, etc.), and industry groups (sometimes called sectors) consisting of groups of stocks in similar industries like semiconductors, computer hardware, etc. The market is composed of sectors and sectors are made up of industry groups.

It is generally accepted that you greatly improve your chances of success if you select stocks from within an industry group that is doing well, or is expected to do well. Market sectors are so broad that they tend to be of little use in industry group and stock selection. For example, the strongest industry groups may not show up in the strongest sectors.

It could be argued that, since we can skip over the sector to find the best industry group, why not skip over the industry group to find the best stock -- the strongest stocks may not be in the strongest industry groups? In truth, such an approach could be quite successful, depending on the methodology used. For example an investor might follow a select and limited number of stocks, becoming intimately familiar with their fundamentals and how they move, and being able to exploit opportunities as they evolve. Or it would also be possible to identify promising stocks out of the entire universe of stocks by using some type of screening aid.

While any of these methods may be effective, staying within strong industry groups is the same as following strong stock markets -- you will improve your odds of success if both the market and industry group are supporting your stock than if your stock has to swim against a strong counter current. Of course, if you happen to own a stock that is performing well in a down market, you would probably want to keep it. Conversely, who cares if the market is making new highs if your stock is barking like a hound? Bail out!

Once you have organized your market and industry group approach, you will need to decide at which point in the normal progress pattern you will be buying stocks -- as they bottom, breakout, or develop high momentum. Your choice will generally result in your being respectively a long-term, intermediate-term, or short-term player.

The bottoming process can take many months, but the patient person may want to identify a stock with a basing pattern, verify that it is greatly under valued fundamentally, and buy near the bottom of the trading range in anticipation that patience will ultimately be rewarded.

Others may prefer to buy when there is clear evidence that a new rising trend is just beginning, such as a breakout from a basing pattern or declining trend line. At this point a stock could be said to be "emerging" and just beginning to trend upward. The advantage is that you can be reasonably certain that a new up move is beginning, while the disadvantage is that you will not catch the entire move from the bottom.

Once a stock begins to accelerate upward it enters the final stage of price growth. Although this final phase can last for months or even years, it can also be a matter of days before the end. High momentum stocks show up at the top of relative strength lists and are identified as price leaders. As such they may be near the end of their price run up, which in many cases can be vertical. Because of this, the momentum player must be more short-term oriented and should be prepared to exit quickly once it appears that the tide is about to turn. Stocks with high momentum are often priced well above fair value and may be subject to rapid and large price drops once the buying frenzy has ended.

Whether to be a basing, emerging, or momentum player is a decision you must make at every level of investment analysis. In other words, it should be applied to your market and industry group analysis as well.

Remember, that the purpose of timing is to increase your returns and reduce your risk. You must develop a well-integrated, coherent strategy that gives thoughtful consideration to all things that will affect a safe and profitable voyage -- the tides as well as the waves and ripples. Then decide where in the shifting seas you will concentrate your efforts.

TIMING MUTUAL FUNDS
It is my opinion that the standard advice given to mutual fund investors is probably the worst advice available in the investment industry: Select a fund or funds whose stated objectives best coincide with your long-term goals, set up an automatic deposit program, then put your brain on hold until it is time to collect all the millions you will have made in the interim.

Some mutual fund investors, like many investors who buy stocks, will embark on a period of intensive research, looking at things like fund manager, fund return over various time periods, stocks in fund portfolio, etc. Once the research is done, they decide on a fund for life, as if they couldn't have been mistaken in their judgment, or as if none of the factors affecting their decision will ever change again. All this stuff is such a waste of time: Fund managers are human and their records will be better at some times than at others; past performance of a fund is no guarantee of future performance; and stock portfolios change on a daily basis.

Performance records are useful in identifying funds that perform a certain way during certain market conditions. For example, aggressive growth funds as a group tend to do well in bull markets, but you still have to own funds based on how well they do while you own them. Use performance records as a way to narrow the field. Use current performance to decide whether or not to own.

Mutual funds are like market indexes or industry groups. They are made up of groups of stocks, and they will perform better or worse depending on how the market is treating the particular stock mix of a particular fund. There is a tremendous amount of rotation of money between industry groups, and an individual mutual fund will fare better or worse based on this rotation. However, you don't have to know any of the details of why your fund is moving up, down, or sideways. All you need to know is WHAT it is doing and to react accordingly.

Mutual fund investors should endeavor to stay in mutual funds that are performing well and avoid those that are not. Most mutual fund "experts" will say this is virtually impossible to do, but it seems to me that this method has a lot better chance of working than the buy-and-hope method. Why would a person be less able to make rational decisions based on current reality (the fund is trending up or down), than they would based on factors that have nothing to do with actual current performance?

The idea that you should move in or out of a fund based on your own or someone else's idea of what the broad market is going to do is also a flawed approach. No matter what fund you own, you should hold it as long as it performs well. Watching the broad market can help you determine your odds of finding a good mutual fund, and can also alert you to the possible approach of entry and exit points. Remember, 80-90% of all stocks will go the way of the broad market, so be prepared to exit if the market tanks , and to enter when it looks as if the market is bottoming. But always act on what your mutual fund actually does.

Mutual fund timing decisions should normally be based on price breakouts (or breakdowns) or price momentum. Breakouts and breakdowns through trend lines and support and resistance levels can get us in or out as the intermediate-term trend is beginning to change and allow us to ride most of the move. When jumping into funds with strong price momentum, remember to stay alert for the point where momentum begins to fade.

Picking or staying with funds in a basing or consolidation pattern is a waste of time and exposes you to risk at a time when the trend is sideways and unprofitable. Individual stocks that are basing may have the potential for very large price moves, and waiting out the consolidation may pay off in a 20 times increase in your investment in less than a year. (See IOMG in 1996.) But I think I can safely say that a mutual fund will NEVER see a price move of that speed and magnitude, so there is no point in holding the fund while price is not appreciating. Get out of the non-performing fund into one that is doing well now. (See Fidelity Magellan 1995-1996. For most of that period it went nowhere.)

The best tool for making mutual fund entry and exit decisions, in my opinion, is simple trend analysis. Mutual funds, being groups of stocks, tend to trend much more reliably and with much less volatility than individual stocks. Yes, there are plenty of exceptions to this rule which will require a broader range of analysis tools, but, as a rule, drawing lines on charts to identify trends, support, and resistance should render exceptional results.

CONCLUSION
We have looked at how timing can be applied to the broad market, industry groups, and individual stocks and mutual funds. We have seen how there is no single timing approach that applies to everything, and that timing methodologies range from the purely fundamental to the purely technical. Timing is intended to improve returns and reduce risk, a goal to which most people aspire. Don't let the prejudice or preconceptions of others interfere with your learning to use the most effective timing tool -- technical analysis.