MLR - Great questions from a member

Published : December 20 2011 at 22:41 ET

Q: Appreciate your thoughts Chris and I agree that human nature doesn't change over the years.

A few quick questions:

1. From your past experience and studies of markets, what was the longest time in history when the market went nowhere, similar to these past few months?

2. Was there a strong buy or strong sell signal that marked the beginning of a new trend at the end of such a trend-less period when you look back in the past?

3. This recent correction in gold again, doesn't it remind of bit of 2008 crash? There gold corrected before the market did and ended its correction way before the market bottomed down.



A: Great questions, Dan.

1. 1976-1977. The model outperformed the general market in both years.

2. Yes, on November 18, 1976, the model returned 8.1% (+24% had 3-times ETFs existed then). On May 10, 1978, after two years of trendlessness, the model returned 26.6% (+79.8% had 3-times ETFs existed then).

3. Indeed so. The model is accounting for that.


This is not the first time the model has had a number of false signals in a row. The challenge is being able to sustain when such a string of false signals occur, thus we have advised pyramiding in slowly so less is lost if the signal proves false in this current trendless environment. Based on history, trends can emerge when least expected, such as March 12, 2009, September 1, 2010, and August 2, 2011. Such periods are very profitable and more than make up for any string of false signals that may occur.

The trend following wizards continue to be down mostly double digits this year:

Many have been trading in this manner for well over 20 years with some boasting 30+ year track records. A year such as 2011 is unfortunate but part-and-parcel of trading.

Here is the link to an article a highly successful trend following friend of mine recently posted which is timely:

After a number of triple digit % years under his belt as he has been trading successfully since the late 1980s, he had the worst drawdown of his trading career this year, but he knows markets can sometimes act in ways that are much unexpected and unpredictable. So he maintains his strategy knowing trending markets will resume as they always have since the civil war (1861-1865).

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