Because of the Efficient Market Hypothesis, nobody knows what stocks are going to go up or down. Not your cousin, not your broker, not your advisor. Over time, the performance of 99.9% of stock pickers is indistinguishable from luck. That’s why I advise investors not to try to time the market.
A stock’s price is based on the earning potential of the company that issued shares. The way the market views a company’s earning potential depends upon several factors, including the company’s ability to earn profits, the state of the company’s sector, and changes in the economy.
Often, in examining a portfolio’s performance over time, it becomes clear that a fund manager is trying to time the market. For example, if your fund was invested in Large Value Stocks in 2010, but by 2012 it had shifted to Large Growth Stocks, the fund would be experiencing “style drift.” The manager is trying to time the market and predict whether it will go up or down. He is speculating and gambling with your money.
Alternatively, we often see the amount of cash holdings fluctuating. This can also be a sign that the fund manager is jumping in and out of stocks. Alternatively, it can mean there is a large outflow of investors in the fund.