Goldilocks Investment Strategy

With all the boom and now bust headlines everywhere now it got me wondering whether the best time to be in the market may be when it is not too hot and not too cold - but "just right" somewhere in the middle (like Goldilock's breakfast!!)

To test this theory I downloaded from Yahoo finance the price history for various world indexes and analysed whether there was an correlation between the historical 1 month, 4 month and 6 month index movement, and the forward 12 month performance. What I expected to see was for example that if the index has grown by more than 25% over the previous 4 months then the market is overbought and the next 12 months will be painful. Severely negative movements over 4 months (eg more than 30%) signal oversold/capitulation and the next 12 months will be better than average.

I analysed AORD, S&P 500, NASDAC, Straits, Hang Seng, with as much historical data as I could find.

Conclusions? some but not all indexes behaved in this way. AORD in particular showed little correlation. But a handful of indexes showed remarkable results.

For Nasdac, by applying a "Goldilocks" style rule, the performance of the overall index could be bettered by at least 8% pa over the period between 1972-2008. Not only that, but there were only 8 years in this 36 year period where the index performance was not bettered. A similar result, (but with a different rule) could be achieved for the Singapore Index.

Of course, since the underlying asset is the same (ie the index), the difference in performance is entirely to do with the level and timing of exposure to the market generated by the rule at any given time.

This last point caused me to pause and question the result given the old addage of "timing the market" versus "time in the market". Also, the thought that if beating the index was this easy every pr**k would be doing it. So I would dearly like the results confirmed/validated by someone else.

Any takers? If you are handy with spreadsheets and are interested in helping then let me know and I'll describe the rule in more detail.