MDM - Status update on fail-safes for MDM and UVXY models

Published : May 6 2012 at 10:10 ET


After final tabulations, the fail-safe on MDM has kicked in. MDM will switch to neutral as of Monday, May 7. The market closed -2.4% on the NASDAQ Composite below where the model initially issued a buy signal. At Monday's open, sell all MDM-related ETFs.

MDM is close to switching to a sell. Lackluster rallies as denoted by price/volume action on the part of leading stocks and major market indices will be monitored as usual, while accounting for quantitative easing which is still ever-present.


TVIX/UVXY will switch to neutral should UVXY hit 14.71, its fail-safe level, or +10% from where the short signal was issued. The level is derived from backtested data showing a number of profitable signals can go nearly 10% against before turning profitable. Meanwhile, losses greater than 10% should be closed at 10% since such losses can become much greater. As stated, this is a work in progress, so the addition of this fail-safe greatly reduces risk on individual signals which can go as much as -38.2% against as shown in backtests, and as much as -80.8% intraday (though that particular trade ended up being mildly profitable).

UVXY is very close to 14.71 based on its closing price. Should the market open lower on Monday, TVIX/UVXY will probably open higher, thus should be covered at the open should it hit or exceed 14.71. Should the market open higher, TVIX/UVXY will probably open lower, in which case, hold onto the position until UVXY hits 14.71. When UVXY hits 14.71, we will send out a report in real-time.

TVIX/UVXY is close to switching to a buy.


The market has been in a trendless pattern since March 26, making it challenging for timing models. The trend following wizards as a whole continue to be in the red for 2012:

Even the great Bill Dunn (Dunn Capital) and John Henry (JWH & Co) who were both interviewed in Michael Covel's Trend Following Wizards are down double digits as of end of March (-10.62% and -17.26%, respectively), even though the general market had been in a 3 month uptrend, with the NASDAQ Composite up +18.7% year-to-date as of end of March and up +13.4% year-to-date as of Friday's close:

There is no data as of yet for the month of April or May, but given the mushy, trendlessness in the general markets since end of March, we would imagine losses for these trend following wizards have worsened.

This speaks to the highly unusual and challenging market environment that has so far been prevalent in 2012. Such aberrant periods are not self-sustaining and have always come to an end. For example, in 2011, the model had a number of false signals, up until its series of true signals beginning on August 2, 2011, which more than made up for the small losses as tracked on the NASDAQ Composite thus MDM was able to outperform the major markets in 2011. Just as patience was required by July of 2011 after a series of false signals, we see a similar situation in today's market environment. As we have recommended in past reports, one might pyramid slowly into their ETFs/ETNs so less is lost should the signal prove false, especially in the challenging environment that currently exists.

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