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FAQs Frequently Asked Questions

Dr K Market Direction Model
While the model outperformed prior to 2018, it has been underperforming since (as of 2-7-19). Please explain.
With market timing, and in view of how poorly the trend following wizards have performed over the years since QE began, the model has had to adjust. While the model did well in 2017, 2018 was sloppy and wide banding due to diminished levels of QE and slowing economies. While varying levels of QE against slowing economies remains an issue as of this writing 2-7-19, the market may trade in wider bands rather than in relatively cleaner/less noisy “QE” uptrends. 

Thus the model opts to capture wider bands as the market may very well continue to trend higher from here but in a sloppy manner given the tug-o-war between QE (given how all the central banks are in alliance to print print print) vs. slowing economies.

In terms of its most recent signals, on January 22, markets gapped lower suggesting a continuation of the downtrend which was pronounced in the last quarter of 2018. The model went to a sell signal. 

A longer term uptrend has since established itself based on price volume action and the limited number of distribution days. As stated in our reports, the model is taking fewer signals to capture major trends and avoid getting whipsawed. This means buying and selling later but with fewer whipsaws and being able to ride major trends longer. This is a different style to those who wish to trade the markets on a shorter term basis. Of course, with stocks, we have advocated for a shorter term approach which in this environment has made sense.

As for MDM performance, the numbers reported in the performance tables do not take into account reduced position sizing. The performance numbers are based on going 100% long, short, or cash. In practice, we advise members to risk significantly less capital than normal should volatility levels become elevated. During such periods, the Market Direction Model will take greater risk by allowing larger losses during such periods to avoid getting whipsawed. Thus, the performance tables do not take into account this reduced level of capital risk. The trade off is larger loss allowances. As with our other services, members are always advised to set their own stops and/or adjust their position sizes in line with their risk tolerance preferences.

Note that my style of trade differs from Gil's style of trade which differs from the time horizons of the model. We can both be sitting on long positions while the model is on a sell, and vice-versa. This is simply because the model takes a longer term approach to capturing major trends in either direction.

What’s important is we make sure our members know that markets change so their strategies must also adapt. The FAQ section created by me with the help of our members with their studious questions has become a place where investors can seek answers. And if any further clarification is needed, they can always write to us. 

As for QE fuel and U.S. markets, other bullish factors are at play. Suntrust and BB&T have done the biggest banking merger totalling $442 billion in assets. This is the second highest valuation since 2009. It’s yet another reason together with Trump’s pro-business, lower tax policies together with exponential growth technologies that the U.S. markets stand a chance at keeping this aging bull market alive. 

But price rules all. So should in time markets head lower by sufficient measure, this would trigger a sell signal. 
First published: 8 Feb 2019
Last updated: 8 Feb 2019