Deborah Weir and I share some space via the internet from time to time as we share ideas on accounting and financial matters on an economics and business studies educators' discussion forum. Since she knows I review every book I read, Deborah asked me if I would review her book. It took some time for me to get the book but once I did i started reading it straight away and despite having left it two thirds of the way through to go on a couple of business trips, I have enjoyed the experience enormously.

I am not a financier but can safely say the vocabulary used in Timing the market is familiar to me and, more than that, Deborah writes exceptionally well about a subject that can look like this and I must stress that what follows is not taken from Timing:

The subtitle of this book is how to profit in the stock market using the yield curve, technical analysis and cultural indicators. This subtitle gives us huge clues as to what is in the book:

• yield curve analysis
• technical analysis
• cultural indicators

In fact there are five parts to this book, the three I have just listed and

• choosing investments
• capitalism at work

I should also point out that there really is a sixth part in that the book contains a very large appendix comprising data sets relating to the various aspects of the book for which they are appropriate. In addition to the hard copy of these data sets, the book provides many internet addresses that allow us to go and grab the latest versions of these data. It also helps to show that these things really do exist: you really can find that someone somewhere is keeping tack of the yield curve data, dating from 1960 to date; gold prices from 1800 to date and, ahem, the Playmate of the year vital statistics from 1960 to date. 74 pages of data altogether

The basic thrust of the book, the, is how anyone can make money by playing the markets. It could even be seen as being the book that levels the playing field as we are very firmly led to believe that if we follow this book, we can make the same profits and take the same buy and sell decisions as anyone who works on Wall Street. I think it doesn't say so but it strikes me that simply by following this book and the data sets, one could make profits in London and Paris, Bonn and Tokyo given that all major stock market indices are heavily correlated. I took a look at that recently and it was true over the last year or so. If I'm right then you don't need to buy any more books than this one!

The yield curve is, essentially, a picture showing the returns or yields on treasury securities from 3 month to 30 year bonds. It can look like this, which you can click to see the full version of this curve:

Notice how the curve starts low and goes higher: that's the normal yield curve. There are inverted yield curves, too, like this:

Knowing that yield curves invert is the key to understanding part one of Deborah's book because it is the point at which the yield curve inverts or reverts back to normality that is the trigger to buying and selling stocks, shares and bonds.

Starting on 1st January 1960, appendix 2.1 starts with a buy position when the result of the subtraction of three month treasury bill rates from the ten year treasury bill rate is POSITIVE.

That result remains positive until 1st February 1966 at which point it turns negative and Deborah advises that we would have sold our or instruments at that point, only buying them back again on 1st February 1967 when the result turns positive again.

Does yield curve analysis work? Well, Deborah says yes and she proves the point by showing us what an imaginary portfolio would have achieved had we just assembled it on 1/1/1960 and left it alone, passive investing. She also illustrates the results of having managed the portfolio actively. I should say that there are various versions of the graphic I present here but their messages are similar:

In other examples from the book, the stated benefits of actively trading are more marked than that shown by figure 2.19.

Technical analysis refers to the analysis of data by using graphs and charts. Starting on page 95, this part of the book comprises a lot of words and 31 different charts. When I talk about financial ratio analysis I tell whoever is listening that the golden rule of financial analysis is to drop everything onto a chart or graph first: the same with technical analysis I am pleased to see.

Moreover, I talk about rates of change and wildly figures are moving around the graph. Again, the same. Deborah tells us about the Volatility Index (VIX), moving averages (for which I have no time) and the put/call ratio. Reading about VIX in Deborah's book will enable you to understand this chart!

Source

Here are two key definitions for us that should help you to start with VIX.

Volatility A measurement of change in price over a given period. It is usually expressed as a percentage and computed as the annualized standard deviation of the percentage change in daily price. The more volatile a stock or market, the more money an investor can gain (or lose!) in a short time.
Source: http://stockcharts.com/education/GlossaryV.html
Volatility Index ($VIX) The Market Volatility Index (VIX) measures the volatility of the market. A recent news story described it as "the options market's gauge of investor fear." Traders use VIX as a general inverse indicator of market volatility and sentiment. High numbers mean that there's excess bearishness, and low numbers indicate excess bullishness. The VIX is updated intraday by the Chicago Board Options Exchange (CBOE), using Standard & Poors 500 Index (SPX) bid/ask quotes. It was created in 1993.
Source: http://stockcharts.com/education/GlossaryV.html

I won't dwell on moving averages as I will assume that everyone reading this review (and there will be thousands!!) understands them.

The put/call ratio is equals the total number of puts divided by the total number of calls. When more puts are traded than calls, the ratio will exceed 1. As an indicator, the Put/Call Ratio is used to measure market sentiment. When the ratio gets too low, it indicates that call volume is high relative to put volume and the market may be overly bullish or complacent. When the ratio gets too high, it indicates that put volume is high relative to call volume and the market may be overly bearish or in panic. StockCharts.com charts the Put/Call ratio under the symbol $CPC.
Source: http://stockcharts.com/education/GlossaryP.html

You can see on pages 116 and 117 that when the put/call ratio is at or above 100% we do something (read the book to find out what!) and when the ratio is at or below 60% we do the opposite (read the book!).

Again, Deborah proves her point by providing the results of passive and active investor strategies, although I won't put them here again since they are in the book.

I was looking forward to reading Part 3, Cultural Indicators well before I got the book as I like such things. I was surprised at the indicators that Deborah had chosen but then gain, they seem to work and my own indicators are untested by the more scientific community. You already know a bit about the indicators that Deborah chose to talk about because I mentioned Playboy above. Take a look at appendix 16.1 to find a data set that include the bust, waist and weight values for the Playboy Playmate of the year. Now, it's not for the likes of you and me to sit in judgement on such a cultural indicator since we are not asked to assess whether we like the data set or not.

This is not as fanciful as it seems, either, since there is a body of research into another one of the indicators that Deborah uses, the Hollywood face. For many years now, academics and practitioners alike have tried to assess the impact of graphical presentation on understandability of financial reports and so on. I find some of them very old fashioned since they are using graphics that went out with the Ark and we now have very advance graphical capabilities. Still, the medium is the message as someone once said.

My own informal indicators are

• what the girls are wearing
• what the boys are driving
• how many skips are outside houses and offices

Again, without wishing to steal the book's thunder, there are good claims made for these cultural indicators but I should make you aware that other reviewers think they are a complete waste of time!

Part f is a relatively straightforward section on choosing investments. This is the culminating section I suppose in that it's all very well waving the magic wands of yield curves etc, here is what you really should be investing in. This is important because up until now, the book has discussed investments in an abstract or very general way. There have been no specific ideas given about stocks, shares and bonds ... until now. I will not preempt what Deborah says here as it will give too much away.

The final section comprises a really good review of things like

• tulipmania of the 17th century
• the South Sea Bubble
• the dot.com bubble
• the Mississippi Company
• the Japanese property bubble
• and a few more

This chapter is by way of a history lesson and a series of warnings; but interesting and as well written as the rest of the book.

Finally, there is a good advert for the United States of America. Deborah is American and she does her country proud in this chapter as she sets out how locals and immigrants alike can prosper in business because of the nature and environment in which business works over there.

Overall, then, Timing the Market is easy to read because it is a technical treatise well written, for the rest of us, as they say! The Content is really useful and if only I had the courage of my convictions I would try everything out and make my fortune ready for an exceptionally early retirement.

Deborah provides a lot of internet addresses; but here's another one Here you can see a bit more about the book, go to Deborah's company's web site and even listen to the fair lady's voice as she is being interviewed!

Duncan Williamson
8th December 2006