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MDM (Market Direction Model): How to deal with profits from the model's buy signal issued some weeks ago

We have received a number of questions on how to manage one's gains in their ETF positions if one bought weeks ago when our market direction model switched signals from a sell to a buy.

We are trend followers so we would not advocate taking profits during a trend. As far as adding to one's position, also known as pyramiding, it depends on one's level of risk. Each investor must determine the level of volatility that suits them. Holding 100% of one's account in a 3x ETF may be too bumpy a ride for some. And some investors may prefer to hold smaller positions with more diversification, while others may not mind having their account sitting in just one or two ETFs. Since ETFs are diversified by their very nature, there is minimal major gap down risk compared to individual stocks which could lose half their value overnight, so holding just one or two ETFs could be suitable to those who prefer to hold several or more stocks.

 

Here is a recent FAQ we posted:

Q: My question pertains to add points on the ETF's. I went long the 3X TQQQ and TYH on Sept 1 and have substantial gains (Thank you Dr. Kacher!). I do have some funds available that I would like to possibly add providing no change of MDM signal. What is the best way to use the MDM service to add to an ETF position? I had noticed "ants" in the Nasdaq Composite being up 12 out of the last 15 days. If one is trading the TQQQ, could one conceivably add to a position on an "ants" consolidation breakout to new highs in an index just like with an Individual stock "ants" breakout? I assume the sign of strength of the "ants" could be interpreted with both an index and Individual stock.

Also, I am wondering if it's best to use the MDM as an "all in" on each signal (buy and sell, assuming one has the risk tolerance) or can one add on/wait for, low vol pullbacks to 10,20, or 50 day moving averages in the indices and other various lower risk entries like Index Pocket Pivots?

 

A: Pyramiding is a personal decision that depends on each investor's risk tolerance levels. Some prefer lower volatility in their trading accounts than others. That said, since you have profits, you have cushion, so could add to your existing position since you are in a psychologically strong position.

The ants work for stocks, but for indices, and thus ETFs, price/volume action is the best indication thus my model weighs in this factor most heavily.

In terms of going "all in" or piecemeal, it depends on one's position sizing style. One could go all in to the respective ETF with each change in the model's signal, but the volatility would be greater, especially with a 3x ETF, than if one were to move in, say, with a half position, then increase it to a full position as the uptrend (or downtrend) continued. Keep in mind that many trends these last few years are shorter lived than they were in cleaner trend trading decades of the 1980s and 1990s.

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This information is provided by MoKa Investors, LLC DBA Virtue of Selfish Investing (VoSI) is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. VoSI reports are intended to alert VoSI members to technical developments in certain securities that may or may not be actionable, only, and are not intended as recommendations. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to VoSI, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Virtue of Selfish Investing. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2024 MoKa Investors, LLC DBA Virtue of Selfish Investing. All rights reserved.
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