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Stock Market Timing
Card counters are feared in casinos. They represent a rare breed – gamblers who can beat the dealer. Unsurprisingly, casinos – hungry to part the foolish from their funds – have banned card counting.
What can stock investors learn from the tactics of card counters?
If you look at the history of bullish expansions compared with bearish contractions in stock markets, it is striking how well they correlate with interest rates. Every month, the world’s central banks – such as the United States’ Federal Reserve and Britain’s Bank of England – make decisions about interest rates. Every month, interest rates are raised, lowered, or maintained at current levels.
When central banks embark on a cycle of interest rate increases, stock markets usually suffer. The reasons why this should be so are straightforward:
- Debt-free companies are rare. When interest rates go up, companies pay more interest on their loans, and their profits fall.
- Interest rates offered by banks to their customers increase, as do interest rates offered on bonds. Investors move money from stocks into high-interest products, causing stock prices to fall.
Probability – The Odds Are Against You
Not all share prices fall during a cycle of interest rate rises, but most do. Stock markets do not always suffer during a cycle of interest rate rises – but they usually do. Trying to make big profits from buying stocks when interest rates are rising is like trying to profit from an evens bet that you’ll toss 5 heads in a row using a fair coin – it’s not impossible but it is highly unlikely.
Stock Market Timing – Lessons from Card Counters
Many investors could improve their long-term returns by learning from the example of card counters – professional gamblers. Card counters play blackjack in casinos. Their strategy depends on the fact that high cards are good for the player while low cards are good for the dealer. They count the high cards as they emerge during a spell at the table. When their count indicates that there are an unusually high number of high-value cards left in the pack, they know that the odds have shifted in their favor. They then make very large bets. The card-counter’s basic strategy is simple; make small bets when the odds are against you and very large bets when the odds shift in your favor.
Favorable and Unfavorable Times in the Stock Market
There is abundant evidence that when central banks consistently cut interest rates, or keep interest rates low, stock markets do better than their long-term average. In contrast, when banks are consistently raising rates or keeping them high, stock markets perform worse than their long-term average.
How Can I Use This Information To Time the Stock Market?
- When central banks embark on a cycle of interest rates increases, you should not be fully invested in the stock market. It is probable that the stock market will not do as well as normally. You should hold money in reserve to buy stocks at lower prices. You should start buying stocks again when a cycle of interest rate cuts begins.
- When central banks are cutting interest rates, you should be fully invested in the stock market, provided stock prices are not falling. This is akin to the card counter placing big bets when the odds shift in his favor. You should stay fully invested until a cycle of interest rate increases resumes.
