MLR - Challenges to Trend Following in Today's Markets

Published : September 22 2013 at 11:17 ET

2013 has been the toughest year so far for market timing and market timing models, let alone the trendless volatile markets of 2011-2012. Indeed, market timing strategies have been well underperforming the general markets in 2013. Being down for year 2013 has become the status quo when it comes to market timing ETFs. Indeed, the trend following wizards which are a group of top fund managers who have been interviewed in books such as Michael Covel’s Trend Following and Jack Schwager’s Market Wizards series are collectively down once again for 2013. This is unprecedented in the long histories of these elite fund managers which sometimes exceed 30 years. Most recent results of these wizards are shown here:

The Federal Reserve announced they would not taper in September which sent stocks and commodities higher on the news. This means a continuation of market manipulation thus potentially more difficult times for market timing, market timing models, and market timing strategies. That said, the market direction model accounts for this so is less likely to switch out of its buy signal unless it detects a short term correction by sensing increased selling pressure in major indices and leading stocks. It may then switch temporarily to a cash or sell signal to capture any profits from the buy signal. And in terms of our other services, certain stocks have yielded big profits including the de facto market leader Tesla Motors (TSLA).

When will tapering begin? Signs so far point to later than sooner as unemployment continues to be a real issue. The drop in unemployment is much due to people simply giving up trying to find work. On the other hand, increasing evidence of a global economic recovery is being seen in juggernauts Germany and China. Is the recent evidence a blip or something more permanent? If it’s just a blip, and recovery is further down the road than expected, the Fed and other central banks will have no choice but to continue to drive their respective countries deeper into debt. This cannot be good for the health and stability of these countries in the long run. And this means continued market manipulation.

On the other hand, if the global recovery takes hold sooner than later, giving central banks headroom to slow the pace of money printing, debtor nations can perhaps ease their debt burden by jumping on the economic growth train. This would mean a probable end to quantitative easing, and thus market manipulation would also slow then end, restoring market internals and normalized trends, as well as the long term track records of market timers of all stripes including the market timing wizards.

Regardless of what happens, the Market Direction Model remains flexible in terms of material changes that occur in the markets, and we continue to stay focused as always on any actionable names on the long or the short side.

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