|
The PRS Time plane is our primary Timing
tool. By its design, it tells us whether the current conditions are favorable for aggressive buying or if we should adopt a conservative approach because the market is overextended and or acting poorly and in need of a significant correction. When used in accordance with our time horizon, which is about three to six months, it provides us with unique and precious information. It won't tell us exactly when the market is going to top or exactly when the market is going to bottom. But I have found that when it comes to general market timing, like the game of horse shoes, close counts. The PRS Time Plane tell us when it is time to be aggressive and when it is time to be conservative and patient, when it is time to wait for the next monumental buying opportunity. The most recent major signal was given in January and February 2007 when the PRS Time Plane urged progressive caution as it signaled an approaching correction of significance.
Over the course of history there have always been times when it didn't matter how
good your stock picks were because the market went through a corrective phase and when that happens almost all stocks go down. Avoiding
these times or simply reducing your exposure will save you a fortune.
What's even better, if you are able to "keep some powder dry" as they say, once the low rolls around, you will be in an enviable position having avoided losses during the correction and having lots of cash as amazing buying periods always follow the unfavorable times.
Getting getting one or two of these
natural market cycles right can be the difference between a normal and an extravagant retirement. The PRS Time Plane gives us a unique advantage over the rest of the market because to the best of my knowledge, very few people have the type of information needed to produce the indicator. When it comes to investing, I want every advantage I can find and the PRS Time plane gives us a huge advantage.
The PRS Time plane tells us when it is time to
be conservative, very conservative, or aggressive. It alerts us when
it is time to get aggressive and or extremely aggressive as the market cycles through rough
times to generous times. Just as spring follows winter, up markets always follow down markets. And, while the market spends much more time going up than down, after a long and strong advance the market will always go through a correction. The best times to buy always come after a corrective
market phase has
been underway for some time, when historical returns are low. When you are ready to give up on the market because no one is making any money in the market, that is the time to buy and the PRS Time Plane is exceptional at identifying these periods.
The
time to be cautious is when historical returns are high and or
very high. We will always be confronted with the proverbial
"how high is high" dilemma, but history is a powerful guide
and The PRS Time Plane reveals unique market characteristics that are most common as advances near their zenith. The PRS Time Plane makes it easy for us to get it right when it
counts the most.
Our PRS time Plane Stretches back over 14 years (data starts 1992.) With that much data it is easy to establish high confidence
levels from which to gauge when strategic portfolio adjustments should be made to maximize our long-term returns. I am not really worried about what happens today or tomorrow. The PRS report is focused three to six months ahead.
Subscribers continually insist the PRS
Time Plane is the most important piece of market timing
information they receive from any and all sources.
What exactly is the PRS Time Plane?
Great question. The PRS time plane show us the return of a grouping of stocks, based on percentile ranking. Yuck! Let's see if I can't clear that up a bit. At this point you should understand that our PRS rankings tell us how a stock's three, six, and twelve month returns compare relative to all other stocks. Let's say a stock is up 25% and has a 3-month PRS of 90. So on that day we know the PRS_3-90 line is at 25%. However, as we move through time and the market goes up and down, a stock with a PRS_3 of 90 won't always have a return of 25%.
At the 2000 highs PRS_3-90 line reached a staggering 125%. I remember the time well as everyone thought they were an investment genius. And with returns like that they should have felt that way. But that was a rare point in time. In contrast, at the 2002 market low, the PRS_3-90 return was down to just 5.6% and no one wanted anything to do with the stock market any more.
The PRS Time plane tracks the performance of each group over time. The level of these returns provides us with insightful information especially when considered against a major index like the S&P 500. You see, when returns are really high folks are overconfident and that can be dangerous. But the worst situation is when returns are falling and the market is moving higher. That translates to frustration and frustration is a precursor to a pullback.
We have all been there before. You own a stock, a good stock, and it should be going up. The market is rising but you have that one stock that refuses to advance. Now that is frustrating. So, what do you end up doing? You end up selling the stock because it isn't going up.
OK, now let's take that from one person and one stock and apply it to a large group of investors and traders. Now we are talking about a large group of investment professionals that own large groups of stocks. They see the S&P 500 going higher but their returns are not matching pace with the market. This translates into broad based frustration, and you know what the end result is? It is exactly the same as the individuals. At some point a breaking point is reached and suddenly the investment professionals sell. That in turn triggers a measurable market pullback.
On the other end of the spectrum, corrections only run so far before there is a bounce. The reason is simple, the investment professionals are constantly being told what to buy. When the market is going through a corrective phase they hold off on the buying as long as they can but after a while they can't stand it any more. They want to buy the stocks they know are good stocks and the lower the prices go the more they are tempted to buy them.
Because the PRS Time plane enables us to see what returns look like on a relative basis we know how tempted traders are to buy aggressively. The lower the returns go, the bigger and faster the pop higher will be.
Big Picture timing
is much more important than most people think it is, especially
when putting new money to work. In the chart below, the red
arrows are points were the PRS Time Plane is urging extreme
caution. The green arrows indicate points at which
investors can become more aggressive. The PRS Time Plane was
urging extreme caution in late 1999 and early 2000. The PRS Time
Plane was telling us to Buy in September and October 1998,
October 2001, and from the summer of 2002 through the fall of
2002.
Hindsight is always
20/20, but these metrics provide
us with a gauge that tells us where we are within the overall cycle
of the market’s ups and downs. The truth is, markets can only
go so far and so fast before something has to give. The PRS
Time Plane tells us when the market has gone too far too fast,
and we can adjust our level of exposure accordingly. Imagine if
you had sold half your stock holdings in late 1999 or early
2000? While it did not seem like the thing to do at the time,
the PRS Time Plane was screaming, THIS IS A BAD TIME TO BUY
STOCKS.
But don't forget, not only does the PRS Time
Plane tell us when to be conservative, it tells us when to be
aggressive too. Through the entire summer of 2002 the PRS Time
Plane was telling us that this is as bad as it gets. And before
you know it, stocks were rocketing higher. Yes, that was an
extreme time, and with a little luck we won't have to go
through that again for a long time. However, if you look at the
chart below, you can see there are many minor points in time
where being a little conservative would have been a good thing,
like summer of 1999. And, following the conservative points in
time are periods to be more aggressive.
The metrics on this chart are not based on what the S&P 500 is
doing or what the NASD is doing. These metrics are based on the
performance of all stocks relative to one another.
The Blue line tells us how well the best stocks are performing
on a three month basis while the Red line tells us how the
worst stocks are performing on a three month basis.
Good times follow bad times and bad times follow good times.
Then the cycle repeats all over again. While the magnitude of
each cycle varies, the whole thing repeats over and over again.
The PRS Time Plane Provides us with a road map. It tells
what where the market really is and what the best course of
action likely is as we look several months forward.
The PRS Time
Plane shows us how stocks at a given PRS level have
performed over three, six, or twelve months. Now, because a
stock’s PRS can change every day, the time plane is not showing
us how a group of specific stocks have performed. The PRS Time
plane is showing us how the stocks at a specific PRS ranking
have performed.
We also look at a 12-month PRS Time Plane.
Because the calculations cover a much longer time span, the
signals are much slower to develop. As conditions deteriorate
and improve, the signals wax and wane. Over the mid-1990's, it
is clear that once the PRS_12 line at 90 (meaning the average
weighted 12-month return for stocks with a PRS of 90) reached
the 80% level, it was about time for the market to begin a
corrective phase. When the sum of the red line plus the blue
line, illustrated by the area portion of the chart, neared
zero, it was time to start getting more aggressive. In the case
of 1998, a bit of common sense and patience would have resulted
in a bit of hesitancy, but it quickly became obvious that a
tremendous buying period had been reached.
With the PRS Time Plane, we know where the
market really stands. Has it really gone up a lot? Is there
potential for it to go up a lot more now? Is it time for prices
to "pause to refresh?" Is this a really great buying
opportunity?
The PRS Time Plane continually answers these
questions for us and that is why it is such a valuable tool for
us today.
With the PRS Time Plane you can buy with
confidence when the time is right. And, when the time is right,
you will know it is time to stand aside, even though everyone
you know is screaming buy buy buy. But you will be able to
stand aside confidently know that a much much better time to
buy lies ahead. And let's face it, getting in at the right time
will make a huge difference in your long-term investment
returns.
Click here for a
Free 30-day Trial or to Subscribe Now
Start Focusing
in the Strongest stocks Now,
Subscribe to the Patterson
Relative Strength Report now through our Secure Site.
|
