Market timing models

In response to the original topic. I apologise if this lands up in the wrong discussion/topic as this is my first post here (please feel free to move it to the appropriate thread).


Out of personal experience, I’d like to share some technical market timing models that I have come across. All timing models are based on 2 main drivers - momentum and deviation from the mean.

You basically are attempting to do one of 2 things from any timing model a) Cut down asset class exposure/rebalance among asset classes or b) Hedge exposure by using derivatives. The trade-off is usually capital gain at risk combined with transaction costs (cap gain taxes, market liquidity of individual positions etc).

The models used by most sell-side houses and institutional investors tend to be broad based in terms of input data. For example, Morgan Stanley Europe uses a CVI model (composite value indicator) that takes into account equity markets P/E, bond yields, macro fundamentals (ISM, payrolls, unemployment figures), investor risk appetite (option put/call ratios, open interest) and so on; signals are generated based on deviation from the mean. You can go through this MS presentation to understand the model better.

For individual investors, given these data are costly to obtain, a simple momentum based model works quite well. The starting point is to decide whether you want to preserve capital by selling off or hedging.

The most simple momentum model is a moving average model which shows you the trend and slope of the trend (very important) in relation to the current spot price of the asset. Almost all investors pay attention to the 200 day simple moving average (SMA) so this would be a good place to start; this works best for the index as opposed to individual stocks so you eliminate event risk.

Moving average models are lagging indicators so they will not flag off a market top/bottom, they simply show you the trend. Longer moving averages aim to eliminate noise from the trend and gives less weightage to recent price action.

There have been studies done in the US ( that backtest this in the US since 1900. A 200SMA model sacrifices the upside in bull markets (by being late to the party) for entirely avoiding long protracted bear markets (notably 1929-32 and flagged the 2001 bubble just after it’s peak).

A frequent problem is that these models generate false positive signals, more often than not, called whipsaws (usually a dead cat bounce in bear markets or steep sell off’s in bull markets). You can refine these models to make them more robust. But I need not remind forum members that derivative exposure combined with whipsaws can be lethal if you are not disciplined.

I believe these models are beneficial for fundamental long-term investors by pointing out flags before it’s too late. People usually compare it to buy-and-hold strategies but for stock pickers who aim to generate alpha, this is an invaluable tool.

I am working on some timing models for the Nifty and hedging using Nifty futures. It is currently technically driven (ie moving averages) and the backtest is promising (90% hedging achieved with significant MTM volatility). I’m working on making it more robust to minimise whipsaws as well as incorporating fundamental valuation based flags.

I would be happy to share them with members on this forum and work collaboratively to refine the model if there is interest.


I think all the valuepickr buddies would be glad to learn the market timing models.

Manish Vachhani

The model rules weren’t explicitly stated above.

You remain invested as long as Nifty spot > 200SMA. Sell/hedge when Nifty Spot < 200SMA. Base hedging efficiency is calculated for the Nifty (ie any portfolio with a beta of 1.0).

The backtested data is for 10 years of Nifty data using an 100SMA model and hedged by shorting the near-month Nifty futures. If the signal indicates a sell during futures expiry, contracts are rolled over.

Interesting data: One woud have remained short Nifty futures from 24 Jan 2008 to 26 March 2009, with 15 margin calls during this 285 day period for a maximum margin call of Rs 13,877, 50% of the initial margin of Rs 25K for hedging a Rs 2.5 Lakh portfolio. The final net hedged gain was 3.1%.

Can someone advise on how files can be shared - googledocs ? And privacy locks ?

Would also be keen to know if there are any valuepickr’s who are knowledgable in VBA/macros and are willing to help out.


Dear Raja,

Welcome to ValuePickr. This is exciting stuff for those interested in Quant modeling. However only a small percentage of folks I know dabble in these.

Not sure if you are aware of this site. You may like to explore

for modeling and backtesting. Last I had seen these guys had extensive back-testing capabilities, and complex filters/conditions could be incrementally built. See if that helps.

We would love to hear more on your expertise, and modeling/back-testing results.

I can also put you in touch with some folks who dabble in Quant modeling for you to take forward your interest.

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Thanks Donald, glad to be here. I’ll definitely check the cockpit out and let you all know how things progress.

A quick intro, have 6+ years of professional long/short and global macro trading experience, last at a large London based hedge fund. I trade/invest full time now (ie this is my bread and butter) and have 3 basic strategies - dividend yield, x bagger (the punting book :)) and positional Nifty futures trading.

Look forward to contributing and finding new ideas/trades from you all. A few stock ideas to follow soon in the appropriate forum.


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Apologies for reviving an old thread.

I felt compelled to share my thoughts after seeing the historic nifty price-book ratio and nifty dividend yield ratio available here:

What I found that

  1. When the ratio : (P/B) / (Dividend yield) > 4, one may consider backing out of stock market and sitting on cash/commodities/bonds. (currently the ratio is 3.18/1.46 ~ 2.17 )

  2. When the above ratio is close to 1, one should definitely consider getting into stock market.

  3. Between 1 to 4, its a grey area and its difficult to comment when exactly should one enter/leave the stock market. I personally would like to stay hundred percent invested with a concentrated portfolio in this zone.

Views Invited.


I don’t think that is the spirit of Valuepickr community. We don’t try to time the markets. Making money from individual stock analysis and valuation is much more important. These ratios are just indicators. We should not dance too much in such mild cases of higher ratio values, otherwise one would get habituated to selling and buying very fast. This would be problematic in future as this high frequency buying-selling habit would not let one ride the winners in extreme bull markets to make real gains.

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