Frequently Asked Questions
Q: One thing I'm struggling with is utilizing your Market Direction Model (MDM) signal and your Volatility Model signal for entering new stock positions. Last evening, you noted two Pivot Points, one for INCR and the other for IDTI (for which I hold a position). When your signals differ between the two models, in this case CASH for the Volatility model and BUY for MDM, do you consider it safe to enter new positions or to remain on the sidelines in cash until the models agree?
A: When it comes to initiating long positions in stocks, you should first let the stock's chart identify its strength. During weak markets, a stock that bucks the trend is strong, thus there may be an actionable buy point ahead. That said, weak markets can be a yellow flag. If you decide to initiate any long positions, you might want to keep them small.
The Market Direction Model (MDM) is an intermediate term model as it seeks to capture major trends, so even if it is on a buy signal, that does not mean the market cannot pull back a few percent which, in 2014 and 2015, have caused leading stocks to fall much harder. Thus, keeping stops tight is key even if MDM is on a buy signal.
The VIX Volatility Model (VVM) is a shorter term model with signals typically lasting a few days or less though it can sit profitably on uptrends for weeks.
If both the MDM and VVM are on signals suggesting market weakness ahead (SELL for MDM, BUY for VVM), you may decide to refrain from entering any new long positions. But keep in mind stocks can act independently from the signals of both models. For example, should a stock show unusual strength during such periods of market weakness, you should keep a close eye on that stock as when the weight of the market comes off, such stocks often spring to life. Also keep in mind that market pullbacks are often met with sharp bounces, so initiating a new long position in a stock at a major support point can be a good strategy.
Further, we can have the opposite situation where MDM is on a BUY, VVM is on a SELL, suggesting a strong market yet there are very few leading stocks acting well. While the major averages may move higher, there are very few to no stocks to buy. This has happened before such as in late 2014 and late 2015 where the major averages shot to new highs while a number of strong names languished.
2014-2016 have been years where buying on weakness has been a sound strategy since uptrends have been short-lived and are followed by pullbacks of a few percent or more, which tend to wipe out any profits made in a particular stock.