The Challenge of Timing the Market: Why Waiting May Not Be Worth It

Trying to time the markets and waiting for the optimal entry point is extremely hard, so hard in fact that it probably isn't worth bothering with, I say that because the chances of getting it right are so stacked against you.

In this article we look at what history says about waiting for a bear market before buying the dip and how some months seem to be better than others for trading returns.

When the S&P 500 enters correction territory—dropping more than 10% from its recent highs—traders face a common dilemma: Do they buy now, or wait for further declines?

The temptation to delay purchases ,until deeper discounts appear would be understandable.

For example, Traders might want to wait until the index moves into a bear market.

The question is do the numbers ( data) support that strategy?

S&P 500 2025 peak to near term trough

Source: Barchart.com

Historical Perspective

Tim Edwards, the MD of Index investor strategy at S&P Dow Jones, recently looked at nearly seven decades of S&P 500 data. He analyzed every trading day, when the index wasn't already in bear market territory- That’s down -20.0% or more from the previous high and calculated how long it was before the S&P 500 index moved into a bear market .

What Mr. Edwards found was very interesting. On average, investors waiting for a -20.0% decline would have waited 3 years.

And even when the index was already down -10.0%, but not yet down by -20.0% (a situation that we recently found ourselves in), the average time spent waiting for a formal bear market still ran to more than 2-years.

That’s a long time for a trader to stay on the sidelines.

The Opportunity Cost of Waiting

“In economic theory, the opportunity cost of a choice, is the value of the best alternative that you have forgone, by making that choice ”

Wait times for the next big fall

Source: S&P DJI

Perhaps more telling than even the waiting times themselves is what happened to the index in these intervening periods.

The Median, or most common outcome was a modest, -1.70% decline in the S&P 500 ,during the waiting period.

However the Mean or average outcome was very different coming in at a +30.0% increase in the S&P 500.

Underlining the equity markets propensity to bounce back after a sharp correction.

When the median and the mean diverge sharply it’s described as a skew or asymmetry in the data.

In this case it’s a positive or right hand skew, to the upside.

Worst case scenario

At the extremes in the data skew which are found in the period from November 1988 onwards. Traders waited over 12-years for the next bear market.

During which time, the S&P 500 index surged by +336.0%.

The tendency for the index to rebound was evident, even when the market had already seen a-10.0% downside correction .

In that instance the average change during the wait for a bear market was a +22.0% increase in the value of the S&P 500.

The distribution S&P 500 returns during the waiting periods

Source: S&P DJI

Whether traders waited for smaller drops of say 1.0%, 2.0%, or even 5.0%, or larger ones of 10.0%,or 20.0%, the pattern / distribution remained consistent:

Most often, waiting resulted in a further modest fall in the value of the index, However sometimes sitting on your hands meant missing substantial gains.

More ups than downs

We can see how the S&P 500 index has behaved annually over the last 25 years in the table below,

In which I have highlighted negative returns in red, it is immediately obvious that in this period (which included the Dot.Com Bust, the Global Financial Crisis and the Pandemic) we have seen many more positive than negative outcomes and only one run of consecutive negative return years in the early 2000s.

Source: Barchart.com/ Darren Sinden

In this table we can also see the variation in the performance of the index on a monthly basis, dating back to 2010. And view that on both an outright and an average basis (see the top row) this is what's known as seasonality.

Using this data as a yardstick it looks right to be long of the US market in July, October and November. Whilst May, August and September tend to favour the short side at least as far as the S&P itself is concerned.

Source: Barchart.com

Trade in April

Seasonality is also apparent in individual stocks, though there is an ongoing debate about whether this is a genuine characteristic, or just a statistical blip.

The chart below shows the variation of returns in Microsoft MSFT US , by month over the last 15-years.

What’s very noticeable is that April is a very active month in the name, with significant moves being generated many of which are to the upside.

Source: Barchart.com

Trading is often about backing your hunches, successful trading is about backing the right hunches more often than not.,One way do that is to let the data guide you.

History and the markets tend not to repeat themselves indefinitely, however, as we have seen in the data and charts above, they do often rhyme with, or echo the past .

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