MLR - Frustrating markets? When will this trendlessness end? How our model has performed in 2011.

Published : December 12 2011 at 21:57 ET

The market's volatile and choppy tendency which makes up much of 2011 is the most difficult environment for catching trends, since any trend tends to be short-lived, though our model did catch the steep drop in early August and part of the steep ascent in early October. That said, we have advised that some may wish to pyramid in slowly so if the signal proves false, less is lost.

Since August 2, the our Market Direction Model at has made nine calls. The first five were true (profitable) signals. The next three were false (unprofitable) signals. The final signal is still open on a buy.

Despite the recent false signals, the model is still up nicely for the year: +17.6% NASDAQ Composite (QQQ good proxy), +45.1% TNA, +56.3% TYH, +136.8% TVIX (though hugely volatile!) as of the last closed signal. The model tends to more than make up for its small losses on false signals with larger gains on true signals as shown on the results page:

This true-false gain-loss 'rhythm' has been true in real-time since 1991 and true in backtests all the way back to the 1920s, thus explains the ability of the model to well outperform the market in any given cycle.

Meanwhile, 2011 has caused most all of the trend following wizards to be down. These are the traders interviewed in Jack Schwager's "Market Wizards" books and Michael Covel's "Trend Followers". Many have suffered double digit percentage losses: 

While we are trend followers at heart, we also use tools and experience distilled into rules that allow us, at times, earlier entry and exit than trend followers.

That said, 2011 has been challenging for most all of us due to its news-driven, gap up/gap down, volatile nature. Experience has shown that trying to preempt or second guess based on impending news events hampers returns over time. The model itself does not anticipate or predict where the market should be headed. It bases its fail-safe on current levels of volatility and price/volume action of leading stocks and major indices. Price/volume action of major indices (including gold and bonds such as TLT) and leading stocks is the best way to navigate through treacherous waters, and 2011 has perhaps been the most treacherous.

The 50,000 foot view is that 2011 is an aberration, thus explains how so many excellent long term trend following wizards have lost sizeable money this year.

When conditions right themselves, and they will since markets cannot stay choppy and trendless forever, that is where such traders and the Market Direction Model excel.

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.