MLR - Have the markets changed for good? Have they become unpredictable?

Published : October 26 2012 at 10:32 ET

Even though 2012 appears to be the most challenging year yet, fortunately, such periods are aberrations and always come to an end. Some question whether the market has changed permanently since the start of dark pools, high frequency trading (HFT) algorithms, and quantitative easing (QE). It is a reasonable question but one must remember that dark pools, HFT algorithms, and QE all have been alive and well over the last couple of years. While these years were challenging, especially trendless, volatile, news-driven 2011, the Market Direction Model (MDM) outperformed in both 2010 and 2011 using NASDAQ Composite as benchmark:

2011 MDM +11.2% vs NASDAQ Composite -1.8%

2010 MDM +26.0% vs NASDAQ Composite 16.9%

One could multiple the above MDM performance by roughly 3x if using 3x ETF TECL.

Eventually, the market will catch a sustained trend. This has historically made a big difference in terms of overall performance over time, and this is the premise of the Market Direction Model. So far, the current sell signal which triggered on October 18 is working but the question remains whether the market will continue lower or continue its attempt to find direction, spurred on by a variety of cross currents. Main event that supports an uptrend: quantitative easing. Main events that support a downtrend: Eurocrisis and slowing earnings in the U.S. and abroad. Romney is catching up in the polls, but Romney vs. Obama remain a wildcard.

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