MDM - Switches to buy January 25, 2012

Published : January 25 2012 at 13:05 ET

Since January 2011, the NASDAQ Composite (as well as other major indices) has traced out the most frustrating pattern since its inception in 1971. Only since the start of 2012, has a new uptrend began, although on volume that is far from robust, in addition to the number of stocks declining on volume having outweighed the number of stocks advancing on volume.

This is one of a number of factors that have worked to keep the model in cash up until now, including the unusually high levels of volatility and trendlessness in the general market, especially from August - December 2011, making for higher risk in being exposed to the market either on the long or short side.Thus the model has required more evidence of buying or selling pressure to switch out of its cash position.

That said, volatility has lessened in 2012, and leading stocks have shaped up somewhat, requiring less buying or selling pressure for the model to switch out of cash. With the market heading higher on unconvincing volume, the model has been looking for a constructive pullback for a buy signal since leading stocks have been looking a bit better.

However, with today's positive market action in stocks, precious metals, and other commodities in response to the Fed's QE-friendly announcement, a pullback of sufficient depth may not come, so the model, requiring less buying pressure, has switched to a buy signal.


Note, that on the cautionary side, quantitative easing (QE) "foot dragging" on part of the European Central Bank (ECB) could resume the continued up/down/up/down pattern of volatility and trendlessnes. While markets tends to look forward by at least 6 months, markets acted in a schizophrenic manner in 2011, as there was no clear direction on a number of important issues.

But this schizophrenic behavior does not mean the markets were wrong. Markets are never wrong. The fact that they were trendless and volatile shows they were right in the sense that there was no clear direction given this tug-o-war between QE and bad news, especially out of Europe. But such a trendless and volatile pattern wreaks havoc for traders and investors.

Change is coming for the US economy with a potentially new government. And markets are forward looking typically by 6 to 9 months. It is also quite possible that Europe will get more material bad news soon (as opposed to repetitive old bad news), which could create more turbulence. There is a safety net, however, as such downward pressure on stocks may prompt the ECB to roll its printing presses in a more aggressive manner. Of course, the model does not fish for bad news but focuses on price/volume action in leading stocks and major indices to light the way, as the way the market responds in terms of price/volume is relevant.


Suggested ETFs:


IWM (Russell 2000)


SPY (S&P 500)


UWM (Russell 2000)


SSO (S&P 500)


TNA (Russell 2000)


UPRO (S&P 500)

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