Frequently Asked Questions
Q: I had a question on MDM. Your model issued a buy signal on 3/3/11. The NASDAQ had a gap up day on that day. According to your book (page 234), buy signals are neutralized during the trading day once the NASDAQ composite trades below the closing price the day before the gap-up buy signal day. The closing price was 2,748 on 3/2/11. Today (3/7/11), the NASDAQ went below 2,748 and in fact closed below 2,748. Your MDM is still on a buy signal.
I would just like to get your thoughts on this. Are you waiting to see if NASDAQ decisively closes below its 50 day moving average (2,741) in order for you to issue a sell signal standby?
My question also applies to the sell signal which was not neutralized even though the NASDAQ traded above the high of the standby sell signal day.
A: In abnormal situations, there are rules that kick in that may keep the model on a buy, or, alternatively, on a neutral or a sell. In the current environment, quantitative easing (QE) has been a powerful force since March 2009. It has prevented the NASDAQ Composite from correcting more than -10%, with corrections often contained to within -5% from peak. The only two exceptions were in May 2010 when QE ended and August 2011 when the Federal Reserve said there would be no more QE together with a downgrade of the U.S. credit rating. Thus, the model is not a black box, but rather will create statistically sound rules should something material clearly change in stock market behavior. I believe this is probably the biggest factor in the continuing success of the model. That said, small changes in the market will occur, but are not material as such changes are often temporary and therefore do not affect the rules the model follows.