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Readers Q&A

Dizzy (Derek) August 31 2010 at 7:45 am (Edit)

Awesome Chris, thanks for the quick response, that answers the questions I had.
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Chris Kacher August 31 2010 at 4:28 am (Edit)

Dear Derek,
Thank you for your kind words.

The Market Direction Model comes with a built-in fail safe, so if the signal is false, it protects itself by neutralizing the signal. The stop loss fail safe level depends on the volatility of the market. In practice, the stop loss is usually contained to within 3% the NASDAQ Composite, thus QQQQ can be used as a proxy. Of course, if one is trading a 3x ETF such as TYH/TYP, then multiple this 3% by 3 = 9% stop loss. If the market becomes excessively volatile such as after the flash-crash in May, it could go neutral while the market’s volatility works itself out.

Leveraged ETFs used to have larger tracking errors. This inefficiency has largely been exploited so today’s leveraged ETFs have far less tracking error than leveraged ETFs that traded a year ago. For example, the model’s buy signal on 3/1/10 on TNA scored a 38.4% gain when it was then sold when the model switched to a sell signal on 4/19/10. TNA is 3x the Russell 2000 index. By comparison, the Russell 2000 was up 11.2% during this period, so an investor who bought TNA made roughly 3x the Russell 2000, with a few extra percentage points thrown in (as opposed to earlier times when the returns would be less than 3x the Russell 2000.

Dr. Chris Kacher
MoKa Investors, LLC
Registered Investment Advisers
Author of: “Trade Like an O’Neil Disciple: How We Made 18,000% in the Stock Market”
Buy it at amazon: http://bit.ly/cZg7ZO

http://www.VirtueOfSelfishInvesting.com

http://www.mokainvestors.com

The information contained herein is not, and should not be construed as an offer to sell or the solicitation of an offer to buy any securities. The information set forth has been obtained from sources which we believe to be reliable, however, these sources cannot be guaranteed as to their accuracy or completeness. The information and content expressed herein are subject to change without notice and MoKa Investors, LLC and/or its employees may from time to time have long or short positions or may acquire direct or indirect beneficial interest in securities mentioned.
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Dizzy August 31 2010 at 2:36 am (Edit)

Hi guys,

Intriguing service, I found my way over here from your recent interview on SeekingAlpha. I have been monitoring CANSLIM for a while now but have not made a deep commitment into it. Your services may be a good way to pick up some of the similar techniques employed in that system, while hopefully making some profit as well.

For Dr. K’s Market Direction service, when you recommend a specific ETF to buy, does that buy recommendation come with a stop loss as well (like 8% from the moment the ETF is bought), or would we wait until getting instructions to go ahead and sell? If so, do the leveraged ETF’s usually use looser stop losses? (I am guessing since they are more volatile that their drawdowns would be much stronger).

One more question, for the leveraged ETF’s, I have read over the past year that these are tricky to use over the long term since they reset daily and have some tracking problems. How does that factor into how the system trades?

Thanks for your time and congratulations on the launch of the site !
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Chris Kacher August 30 2010 at 4:30 am (Edit)

Variables used in scans/screens depend on the investor’s risk tolerance and investment preferences. Some investors are ok with buying less expensive stocks that are smaller cap in nature. Others prefer not to buy such stocks.

Here are some of our recommended screening variables:
Stocks over $15
Average daily dollar volume over $10 million
RS above 82
Current price > yesterday’s closing price
Price within 5 to 8% above its 10dma (or 50dma).
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balaji August 29 2010 at 10:54 pm (Edit)

Hi,

Thanks for your newsletter. I am learning a lot from the VOSI and gilmoreport.com sites. Its lot of worth to learn in a very short time. What is the scan that you normally use for pocket pivot? Do you apply any rank on top of pocket pivot ? Because I created a scan if the volume is higher than any of the daily volume for past 10 days. But I got lot of stocks of using this criteria. Is there any simpler approach that you guys follow.

Thanks.
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Chris Kacher August 27 2010 at 1:10 pm (Edit)

It was these very sorts of discussions and debates which further spurred on my statistical studies in the 1990s. While I created the algorithms in the early 90s while a student in grad school, this work eventually became my Market Direction Model™ which integrates many variables (price/volume, shape of price/volume action, market indices and leadership) into a complete picture. I continued to refine the algos as my ability to identify proper distribution and confirmation days improved, much as one would continue to refine their ability to interpret the strength or weakness of a basing pattern in a chart. I realized then that the limitations of the ‘M’ in William O’Neil’s CANSLIM were not the fault of the system, since the principles behind the system are sound, but rely on proper interpretation of buying and selling pressure within the major averages and leading stocks.

As to the advent of dark pools, high frequency trading (HFT), and the like, a few rightly question whether price/volume action and trend following are still applicable. Over the last century, whenever there was a big change to infrastructure, such as the advent of radio and television to disseminate news, the move from 1/8 to 1/16 spreads, or the move to decimalization, such moves have spurred questions about the viability of trend following and price/volume action. Yes, markets did change, but the overriding principles remained sound. Thus, my answer is a resounding yes that price/volume action and trend following are still applicable. My Market Direction Model™ was up +55.1% from June 1, 2009 – June 1, 2010 in a test fund using actual money, with exposure to the market less than half the time. Rothstein Kass has audited the account. In a separate account that was not using actual money, I wanted to see how my system held up against a volatile instrument such as the 3x technology ETF TYH, going 100% long on buy, 100% short on sell, and 100% cash on a neutral signal. Such instruments did not exist until the last year, so this gives big opportunity for profit that did not exist before. From March 12, 2009 (the day of the big first FTD) to June 30, 2010, the model was up +207.4%. Of course, due to the highly aggressive nature of this account, drawdowns as high as -18.5% were not unusual, which occurred when the market was trading sideways (see attached), and elicited a series of false signals, but that is the price to pay to get to +207.4%. That said, my model’s Achilles’ Heel are sideways markets with low volatility such as in 1976 and 1993 due to a series of false signals with very little gained from any short-lived trends, thus the model finished a year such as 1976 up less than 7%, well under it’s annualized average of +33.5%/year.

The bottom line is that trends still occur even in these highly unusual times. Just ask Michael Covel who wrote the excellent book “Trend Following” which contains in-depth interviews with successful long-time trend followers John Henry, Bill Dunn, and Ed Seykota. And yes, while such noted trend followers have been encountering difficulty since 2009, they are no stranger to steep drawdowns, and in their 25+ year careers, have always more than recovered, thus maintaining the integrity of their long term track records. In their careers, there have been periods where trend following and price/volume action was declared dead but what makes them unique is they continue to apply their systems through thick and thin, knowing the markets will always trend again.

Dr. Chris Kacher
Managing Director
Teardrop Rain, LLC
Managing Director
MoKa Investors, LLC
Registered Investment Advisers

http://www.VirtueOfSelfishInvesting.com

http://www.mokainvestors.com

The information contained herein is not, and should not be construed as an offer to sell or the solicitation of an offer to buy any securities. The information set forth has been obtained from sources which we believe to be reliable, however, these sources cannot be guaranteed as to their accuracy or completeness. The information and content expressed herein are subject to change without notice and MoKa Investors, LLC and/or its employees may from time to time have long or short positions or may acquire direct or indirect beneficial interest in securities mentioned.
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investormom August 27 2010 at 3:55 am (Edit)

Hi guys,
Quick question. When you recommend a stock, do you take into consideration the current suspicions that hi freq traders are messing up the chartology? NYTimes had an article about it:

http://www.nytimes.com/2010/08/23/business/23flash.html

And Nanex had a detailed study showing proof of HFT quote stuffing:

http://www.nanex.net/20100506/FlashCrashAnalysis_Intro.html

So, for example, if you are recommending APPL and HTFs decide to mess with the bids that day, how would that affect your MDM prognostications?
Have you ever considered looking to other markets (say Brazil) for stocks that haven’t been polluted by HTFs?
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Chris Kacher August 26 2010 at 5:43 pm (Edit)

Thank you! We are happy to hear you are enjoying the site.

Certainly 12-15% over the long run is achievable. Keep in mind there is so much noise out there on the internet and on television so it is easy to get distracted and derailed from a sound trading strategy. This can affect even the most experienced investors at times.

Since you are not looking to bag the big brass ring return of what we call 100% in a year, keep your position sizes and market exposure conservative, especially if investing in a volatile stock with a high relative strength.

Best,

Dr. Chris Kacher & Gil Morales
Managing Directors
MoKa Investors, LLC
Registered Investment Advisers
Authors of: “Trade Like an O’Neil Disciple: How We Made 18,000% in the Stock Market”
Launch Date: August 23, 2010. Buy it at amazon: http://bit.ly/cZg7ZO

http://www.VirtueOfSelfishInvesting.com

http://www.mokainvestors.com

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investormom August 26 2010 at 6:04 am (Edit)

Hello! Where have you been all my life? I’ve been a dutiful 401k investor since the late 1980s. My husband and I have done pretty well and are on track for a comfortable retirement but the 00s have been brutal. I am planning to open a Fidelity account with a nominal amount of money and try out your Market Direction Model for about a year. If all goes well, I’ll do the same with a 401k rollover that needs some goosing. I would be happy with a 12-15% return over the next 15-20 years. Is this kind of return really possible? (I am having trouble containing my selfish thoughts!) If things are this easy, why isn’t everyone doing it?
I have never traded a stock in my life so this is going to be interesting.

Regarding the website:
Thanks for all the free examples of your email alerts. Other sites require you to sign up for trial periods before they share any information and even then crucial bits are withheld unless you sign up for at least a year. I also really appreciate the ability to subscribe monthly or quarterly. So far, I would say “Bravo! Job well-done!”