Frequently Asked Questions
In my experience, the market assimilating any strategies I've used has never been the issue. Rather, it has been that markets change. For egs, base breakouts stopped worked post 2003 simply because the tone of the markets changed. They consequently became more compressed from 2004-2007.
Then the tone changed again in 2009 with quantitative easing. I made necessary adjustments in early 2009 to address this material change in behavior.
In the last few years, the tone changed again to where, when it comes to buying and selling stocks, it's better to sell strength when the price gets ahead of itself in context with the stock's chart and buy constructive weakness to keep risk to a minimum.
Thus the key is to adapt to any material changes in the markets.
Both timing models are adaptive in that they take in the data, and if there is enough evidence that a material and lasting change has taken place, the models will adapt accordingly. This does not guarantee profitability in the case of the Market Direction Model (MDM). For example, 2013-2014 were years highly manipulated by quantitative easing so the general market would sell off just enough to put one back into cash, then find a shallow floor and resume its uptrend.
Then 2015 came along which was mostly trendless until late in the year.
The Trend Following Market Wizards, many of whom have been interviewed by Jack Schwager and the like have never suffered such poor performance since 2009. They collectively have lost money almost every year, an unprecedented occurrence as they sit with 20 to 30+ year track records: http://www.automated-trading-system.com/resources/trend-following-wizards-fund-performance/
But that further underscores how much QE affected the stock market.
The VIX Volatility Model (VVM) was an answer to this material change. Backtests have shown it to be highly profitable in trendless markets as well as in uptrending or correcting markets.
VVM focuses on price/volume so while 2016 was its most challenging year yet, it was still able to be strongly profitable after the updates were put in place.
I've conducted extensive backtests going back to the 1990s and spot checking periods as far back as the 1920s. I have tracked VIX, bull and bear markets, and how the everchanging, dynamic list of leading stocks behaved through each cycle. The VIX Volatility Model should continue to outperform even as markets change. VVM loves volatility as well as uptrending markets. Its most profitable moments occur during market corrections. It thus trounced the market averages in 2000-2002, 2008, 2010, 2011, and in late 2015. It also did well in early 2016 which made up for the challenges later in 2016 including the Brexit surprise which was followed by the most go-nowhere S&P 500 in history between the months of July through October as we detail here: http://www.virtueofselfishinvesting.com/reports/view/market-lab-report-mega-frustrating-markets-not-necessarily
So to summarize:
- VVM utilizes regression to the mean during choppy, go-nowhere markets such as we saw in 2015.
- VVM utilizes trend following strategies during uptrending markets.
- VVM utilizes profit taking strategies during correcting markets when volatility spikes.
- VVM utilizes fail-safes at all times to keep risk in check.
Backtests (and partial real-time trading) have shown triple digit years every year except for 2016. CAUTION: To achieve such returns, expect sharp moves in your position at times. This can be enough to cause an investor to prematurely sell their position. Smaller positions may be warranted depending on your risk tolerance level (pain point). Also expect a string of false (losing) signals at times. This can be enough to discourage an investor from taking the next change in signal.
Dr. Kacher's backtested (and partial real-time) performance using the VIX Volatility Model:
Also always realize that past performance is never a guarantee of future performance. Think about how much markets changed after quantitative easing began in full measure in early 2009. Never risk money you cannot afford to lose.