Frequently Asked Questions

Dr K Market Direction Model
Q: The Market Direction Model (MDM) has had a challenging time with these trendless markets. Meanwhile, I've been able to profit nicely taking profits from the VIX Volatility Model's (VVM's) signals since its recent launch. Please comment.

A: The markets have become increasingly more difficult to capture trends as was evident in 2015, a year which, by some media accounts, was the most challenging in 78 years. Of course, that also was accompanied by some saying trend following is dead. Such declarations have been made numerous times over the last hundred years, and usually is followed by markets that return to a trending manner as human nature has not changed. The difference in the current environment (as of this writing 3/8/16) is that central banks continue to try to manipulate markets higher by way of quantitative easing. We have never had such an easy money, low interest rate environment globally speaking. 

That said, MDM attempts to capture intermediate term trends which is nearly impossible to do in non-trending markets. The good news is that since QE has ended in the US, MDM has reverted back to its old non-QE rules as of February 2016 as the tone of the US market this year has clearly moved away from the non-correcting QE-driven markets especially starting in 2013. 

The challenge is whether the Fed will adopt negative rates as other central banks have done which is another form of QE and could create another struggle as we saw in 2015 where markets are pushed higher by such actions but reluctantly so. However, the markets seem to be expressing exhaustion regarding the low rate environment which has yet to help to spur any sort of meaningful growth. Indeed, in 2016, the market had the worst 10-day start to a calendar year ever. Thus a real bear market of significant magnitude seems to be in the offing sooner than later. MDM stands at the ready.

As for the VIX Volatility Model (VVM), it was inspired by the trendless market of 2015, so is designed to capture short term moves in volatility. Indeed, it has captured quick 15%+ gains in a day or less when it was in its beta testing phase on the website and also more recently since its formal launch. Such gains are not reflected in the VVM performance table but are mentioned in the VVM reports we have emailed to members. 

VVM also captures trending moves where it can sit on a signal for several weeks. Despite the trendless markets of 2015, backtests showed it had profitable signals lasting as long as 9 weeks in 2015 as it captured the trend in the ETF XIV. Outside of this trend, it was still able to finish 2015 up nicely overall as the fewer but larger profits outweighed the many smaller losses that year. The fail-safes proved to be of great value in keeping risk to a minimum. 

In the years prior to 2015, VVM switched signals fewer times on average while continuing to achieve strong results. That said, the only thing that never changes is change, so while the results are so far highly promising, always keep in mind that past results are never a guarantee of future results. Thus should VVM have a string of highly profitable back-to-back signals, this is no reason to start oversizing your position.

Published: Mar 8 2016