MDM - Model switches to cash December 27, 2011

Published : December 27 2011 at 14:00 ET

The model has switched to cash as it likely, based on history, that the market will either be flat or up into the end of the year. In addition, trading over the holiday period can become more retail oriented as institutional volumes diminish, thus given current levels of unusually high volatility, can stay chaotic even on lower levels of volume. Either way, the trading edge is not with us by staying on a sell signal at this time.

That said, with recent decisions out of Europe for continued quantitative easing, where the European Central Bank will provide 489.2 billion Euros to 523 banks starved for liquidity, and with dollars available at lower rates until Feb 1, 2013 to help Europe's troubled financial sector, the next switch may very well be to a buy signal. But the future does not exist, only the present, so we will have to wait and see. After the holidays, price/volume should provide more light down the passageways which have been especially dark and twisty given the trendless and volatile nature of 2011.


Market Wizard/Turtle trend follower Curtis Faith stated in his book 'The Way of the Turtle' how he had 17 losing trades in a row in cocoa because he could not catch a trend, and how his investor couldn't take the pain and cashed out. Right then, his system caught a trend and more than made up for all those loses.

Here is the link to the article which includes a note on recency bias:


After the model profited hugely from the May 2010 flash crash, it intentionally stayed in cash for longer than normal periods since my studies have shown that after such a short sharp correction, the market often stays relatively trendless and choppy for a number of weeks. It consequently issued only 3 signals between it's successful April 2010 sell signal and its September 2, 2010 buy signal. Two of these signals were true while one was false. It was the model's ability to stay in cash long than normal which led to its performance post May 2010.

In more recent times, since its 5 true signals since August 2, 2011, it has had 5 false signals, as the trendless, volatile period has lasted far longer than normal. In the history of the NASDAQ Composite going back to the early 1970s, the last few months wins the record for being the longest, directionless, and choppy period.

What is reassuring is that such periods have always come to an end then new trends begin. That the market would stay in such a trendless, volatile, gap up/gap down news driven environment would be a first, historically speaking, thus odds are that the market will find a trend sooner than later, and that is what the model (and top trend following wizards over the last century) have banked on. Since the civil war (1861), when someone says "This time it's different", it's never really different because human nature doesn't change.

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