MLR - Smack Down for Top Guns

Published : July 22 2012 at 10:00 ET

As expected (from the June state of trend following report), this year has proved to be a bad year for most Trend Following Wizards, a group of fund managers who have been interviewed in books such as Jack Schwager's Market Wizards and Michael Covel's Trend Following. Check the left column of the table in the link below: all red except for Saxon Investment who posted a 0% monthly performance as they seem to have triggered another high volatility “trading pause” (as they did last year when they side-stepped the markets for a few months).

Indeed, Investor's Business Daily writes:

Quick turnabouts in IBD's Big Picture Market Pulse have been the pattern since the indexes marked intermediate lows in early June. In less than two months, IBD's Big Picture Market Pulse has switched six times.

A look at the Nasdaq's daily chart shows why. Action has been in an uptrend but in a choppy fashion — something investors saw last year.

But predicting the market is not IBD's mission. The goal of the Market Pulse is to describe current conditions. Why is that so? Part of bad investing is guessing what will happen next. The disciplined investor simply tries to grasp conditions and plays that reality.

Right now, indecision rules as the market struggles.

Last year, despite its general trendlessness, we were up well into the double-digits using the Market Direction Model (MDM) but this year has been a challenge. Read Michael Covel's book: "The Little Book of Trading: Trend-Following Systems for Big Winnings," which discusses the concept of investing with a trend-following model and the need for investors to have the proper psychological ability to sit through drawdowns when the model doesn't work and issues bad signals. One has to decide whether investing according to a trend-following model like the MDM is for them, and either stay with it and adjust their risk based on position sizes or ETFs used, or simply abandon it altogether. That is pretty much what it boils down to, since we can't make the model do anything different than what it is doing right now. Because we have our own money invested in a portfolio that uses the MDM as well, we have felt the same pain in 2012 ourselves, but we don't consider it anything more than part and parcel of investing with something like the MDM.

Right now feels like July 2011, after MDM issued a series of false signals, then more than made up for it with far larger gains on true signals that ensued, allowing the model to finish 2011 well ahead of the major averages as measured by any ETF or index such as NASDAQ Composite or TECL (formerly TYH). MDM is no stranger to challenging, trendless periods such as it encountered in 1999, 2007, and 2011, but has always managed to eventually well outperform.

In the meantime, we will start to integrate our shorter term reversion to the mean/swing trading models with MDM and TVIX/UVXY strategies as well as continue to provide members with real-time emailed reports on stocks with top technicals and fundamentals via pocket pivots, buyable gap ups, and short sale set ups.

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