Can you forecast the market?

While such short-term performance should be viewed cautiously, other investors have outperformed the market over the long term. Among those who have enjoyed extraordinary long-term success by incorporating elements of short-term or long-term timing into their investing across many markets are John Henry, owner of the Boston Red Sox; William O'Neil, publisher of Investor's Business Daily; Marty Schwartz, who ran $40,000 to about $20 million with never more than a 3 percent drawdown; and Ed Seykota, the Massachusetts Institute of Technology engineer and investment luminary from Lake Tahoe, Nev.

Are they merely the exceptions who prove the rule? Interestingly, some of the traders who have performed well have taught students who have also outperformed the market. The Turtles, a group taught by commodity traders Richard Dennis and William Eckhardt, are perhaps the best-known group of highly successful students in the trading world.

OK, some analysts say, maybe a few gifted individuals can beat the market, but average investors can't. People are better off allocating their portfolio among stocks, bonds, and other investments, they conclude, rather than moving in and out of stocks. And how much they put into stocks should depend on how much risk they care to take on.

"We might address the level of market risk by recommending a lower allocation to equities and perhaps a higher allocation to bonds and cash," says Catherine Gordon of Vanguard Group, an investment management company based in Valley Forge, Pa. But risk exposure "is something that should be driven by the client's objectives and needs and not by an external timing model."

By definition, allocating assets reduces the overall level of market risk. That's an important technique for any investor. Its limitation is that it doesn't decrease the risk for the stock portion of someone's portfolio. In the Vanguard model, as long as a client's objectives and needs remain the same, her exposure to market risk remains the same, no matter where the market stands.

In contrast, a central tenet of the timers' approach is that there are times to reduce exposure to stock and times to jump in with both feet.

History urges caution at the moment, many timers suggest. Prior to 2000, the market peaked in 1929, 1972, and 1987 then crashed each time (see chart). At those peaks, the broad market reached values of about 20 times peak earnings. In other words, an investor wanting to buy a company's stock had to pay about $20 for every $1 that company earned in a year. (To account for recessions, when earnings fall quickly, Hussman uses the highest earnings achieved in the prior decade, something that can be called peak earnings.) Now, despite its huge fall since 2000, the market stands at 19.5 times peak earnings.

"When stocks have been as richly valued as they are now, there's always been some period between four and 17 years later when stocks have reached a durably low valuation," Hussman says. During that time, "the returns have been dismal."

In the shorter term, some analysts are bullish. "Improving economics, better profits, risk-averse investors, global expansion, and election-year rhetoric should push the market higher," says Ned Riley, chief investment strategist at State Street Global Advisors.

In running his fund's portfolio, Hussman takes the shorter term into account by adjusting the market risk of the portfolio according to his statistical assessment of the current market climate. He defines market climate as a combination of market levels and shorter-term conditions including interest-rate trends, how broadly the market is rising or falling, and other factors.

As for average investors, Hussman discourages active market timing but does suggest they add to their stock holdings when the market is cheap and trim holdings when it's expensive.

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