MDM - Switches to Sell 08 March 2011

Published : March 8 2011 at 9:47 ET

Sufficient selling pressure on the NASDAQ Composite and leading stocks have pushed the model into a sell signal.

Keep in mind that quantitative easing 2 is alive and well until at least June. This could result in only marginal profits or small losses on this sell signal. That said, even during such unusual periods, the market will eventually find a trend, either up or down, which is nicely illustrated by the model's big gains which more than offset its small losses

Note, for 2011, the NASDAQ Composite has gone nowhere. Rather, it has been trading in a sloppy and choppy manner. The false signals are indicative of such an environment. We already know from several whipsaw signals in the Market Direction Model that we are dealing with a strange, anomalous period making it a tough environment for trend followers and position traders. Such periods are unusual and always come to an end. Patience is required.


A revelant question came up. One member writes:

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?

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 exception was in May 2010 when QE ended. 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.



If you wish to invest in inverse ETFs for the purpose of hedging any long stock positions or for the purpose of engaging in tactical trades to capitalize on momentary market weakness, here are some inverse ETF suggestions:

Note, if your intention was to buy the 1-times ETF but that ETF is unavailable, buy half the position of 2-times ETF, or one-third the position of a 3-times ETF.


EUM - inverse emerging markets (emerging markets have been acting weaker than US markets)

EPI- inverse India - market has been acting weak


EEV -inverse emerging markets (emerging markets have been acting weaker than US markets)

BZQ - inverse Brazil - market has been acting weak

SSG - inverse semiconductor (volatile so proceed with caution)

FXP - inverse China - market has been acting weak

INDZ - inverse India - market has been acting weak


SQQQ - Among 3x ETFs, this provides the best risk/reward when used with TQQQ on buy signals

SOXS - inverse semiconductor (volatile so proceed with caution)

EDZ - inverse emerging markets (emerging markets have been acting weaker than US markets)

This information is provided by Virtue of Selfish Investing, LLC (VoSI) is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. VoSI reports are intended to alert VoSI members to technical developments in certain securities that may or may not be actionable, only, and are not intended as recommendations. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to VoSI, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Virtue of Selfish Investing, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2016 Virtue of Selfish Investing, LLC. All rights reserved.