The 3 Keys to Profitable Mutual Funds Timing

If you can accurately predict the direction of the stock market, you are in for some great investment profits. Unfortunately no one can do that religiously, but there are ways to approach this in a scientific fashion that offer the hopes of more certain fortunes.

Most people invest their money in mutual funds hoping that a rising stock market will pull up the price of their fund, but the key to bigger profits is picking the right type of fund based to start. But how do you do this? Years ago equity strategist Sam Stovall did a study showing that various sectors of the stock market went up or down at different phases of the business cycle. The way to beat the market was to invest in the best performing sectors at the right time. You picked your sector fund based on the phase of the market cycle. Today with ETFs and Vanguard or Fidelity sector funds, it is easy to have many funds to choose from that fit Stovall’s criteria.

What Stovall failed to reveal is the annual seasonal tendency of these sector funds, namely that there are certain times of the year, for each stock market sector, when it typically makes a price high or low. This information is very useful for investors who want to get in and out of fund sectors safely and who are intent on trading mutual funds with an active approach. Typically these traders use momentum and moving averages to get in and out of various funds, but if you know the average seasonal tendency of funds, this information, combined with trend following methods, can offer superior investment profits.

Here are the three things you need to know to do this for the best results…

First, to properly time sector funds for the best results, it helps to first know which stock fund or sector fund is likely to outperform the market. You start with a subset of the funds likely to outperform, and then you engage in mutual fund timing for buys and sells. You can use Stovall S&P sector rankings to identify the likely top funds, or you can simply keep track of the relative strength of various funds to see which ones are currently the market leaders, and take your bearings from there.

Second, you need to know the seasonal tendency of various funds, such as Fidelity or Vanguard sector funds if you are intent on mutual fund trading, to know when to expect yearly highs and lows you can take advantage of. This will help you in trading various stock funds because you will have an expectation for when to take signals and when to ignore possible whipsaw trading.

Third, you need some type of trend following system to signal when to get in or out of the sector mutual funds you are thinking of trading. When trading mutual funds, it not only makes sense to have a conviction on the top performers and their seasonal tendencies, but some technical analysis system that confirms when the funds have turned either up or down at the anticipated period.

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