Frequently Asked Questions

Dr K Market Direction Model
Is your model discretionary in any way? Do you only adhere to the market direction model rules in your book?

The signals generated by the model are systematic and have proven out since 1991 as a guide to my trading and backtested to 1974, as well as backtested in entirely different eras. I will alert members if the signal change is the result of a material change in the market such as quantitative easing in 2009, or an unusual circumstance that is still statistically based but nevertheless an unusual occurrence. In addition, I will recommend 1-times, 2-times, or 3-times ETFs. I hold to my original thought: I figured if someone with O'Neil's extensive market experience could get whipsawed during challenging, trendless markets, perhaps it is better to stick with the set of systematic rules that have statistically proven themselves based on actual price/volume action of the major indices. O’Neil always said opinions do not matter, just the facts, and price/volume is as factual as it gets.

Examples of unusual circumstances include:

  • Enough leading stocks breaking out of sound basing patterns, such as we saw in March 1996 when stocks such as Iomega (IOM) were breaking out to new highs
  • A huge confluence of reliable secondary indicators showing either strength or weakness in the markets.

  • Highly unusual one-time news events that are forward looking.

During 'normal' circumstances, the general rules in the book apply nicely. The model is systematic but is discretionary in terms of adapting to new material changes in the market (and to position sizing, diversification, etc). So for example, when technology stocks with no earnings continued to jump in price by leaps and bounds in the late 1990s, the model adapted to this fact, thus allowed some of these names to be considered leaders. It has since kept this new rule which was instituted in 1998.

More recently, a material change is quantitative easing, which began in early 2009. The model adapted, creating systematic rules to allow for this material change.

Published: Jun 22 2010, Modified: Jan 20 2012