Given the degree of selling pressure in certain leading stocks and major indices, the model has switched to a sell signal. Past leaders such as AAPL, BIDU, GMCR, NFLX, and AMZN have broken down or are a breath away from potential breakdown as their patterns show downside momentum as they approach their 200-day moving averages or worse, have already undercut their 200-day moving averages.
While dollars are now available at lower rates until February 1, 2013 to help Europe's troubled financial sector, the question remains how quickly European Union leaders will deploy increased measures of quantitative easing (QE). Price/volume action in TLT (Barclays Capital 20+ year U.S. Treasury Index), the price of gold, and the price of a basket of commodities all show increasing odds that the ECB may not act in a timely manner.
HFT (high frequency trading) may exacerbate the trendlessness seen in recent markets. That said, the model managed strong returns in 2009 and 2010. 2011 is looking to be decent, though not nearly at the levels of 2009 or 2010. So despite HFT trading, there is still room to capture gains. The markets tend to have an invisible hand which keeps profitability on the side of trend followers. I remember a number of times over the last 20 years when people declared trend following dead. And when I read news accounts and books published prior to 1940, the same thing happened. Every time the market went into a trendless manner for a number of months, news accounts would record many declaring that trend following is dead for any number of reasons which all seemed plausible at the time.
The enduring nature of trends explains how the trend following wizards continue even after 25 years to outperform. 2011 has been one of their worst years as 2011 has been mostly trendless. 2009 and 2010, on the other hand, contained enough trends that they could well profit.
One member put it best when he wrote to us last week about the challenges of 2011:
I started my subscription with Virtue of Selfish Investing and started taking the model's signals for TNA at the start of the recent streak of losing trades. Naturally I've been concerned and feel bad luck is on my side, but I went back and looked at the historical trades over the bast few decades. It is not uncommon to have streaks of 4 or more consecutive losing trades and the fact the model is up this year is very surprising [given how trendless 2011 has been]. I feel if it's a true trend trading system, I should break even at the bare minimum over time and eventually the market will have a long move in one direction. It's just a question of when.
HOW TO ACHIEVE THE MDM'S RESULTS
The gains are based on applying the trade at the time the model switches signals. 2011 has been a gap up/gap down environment with much volatility making for a frustrating environment indeed. We have a number of members based on their emails to us that have been able to more or less reproduce the model's results. That said, members who can only place trades at the close of the trading day or at the open the next day notice either a larger than normal positive bias or larger than normal negative bias, depending on how much the market moves from the time the signal is issued and whether the market gaps up or gaps down at the open. This naturally increases the disparity (either positively or negatively) between the model's returns and the returns achieved by trading in this manner, especially in a year fraught with news driven gap up/gap down volatility.
In less volatile/aberrant markets, if one can only trade end of day or at the open the next day, there will still be a slight negative bias since strength normally begets strength, and weakness begets weakness, though returns should be roughly in line with results. To achieve the results shown, we advise members to place trades as closely as possible to the change in signal. Members can set up real-time email alerts on their mobile phones: https://www.virtueofselfishinvesting.com/faqs/answer/Can-I-receive-reports-such-as-market-direction-model-signal-changes-on-my-phone
In more normal years, the model tends to switch on average between 12 to 20 times a year.
Suggested inverse ETFs:
RWM - Russell 2000 small cap 1x bear. It should approximate 1x the inverse of the Russell 2000.
PSQ - NASDAQ-100 1x bear. It tracks 1x the inverse of the NASDAQ-100.
SEF - Financial Select Sector Index 1x bear. Since banks are getting squeezed due to "Operation Twist", and banks in Europe are even worse off, this ETF has been one of the weakest to date.
TWM - Russell 2000 small cap 2x bear.
QID - NASDAQ-100 2x bear.
SKF - Financial Select Sector Index 2x bear. Since banks are getting squeezed due to "Operation Twist", and banks in Europe are even worse off, this ETF has been one of the weakest to date.
TZA - Russell 2000 small cap 3x bear.
SQQQ - NASDAQ-100 3x bear.
FAZ - Financial Select Sector Index 3x bear. Since banks are getting squeezed due to "Operation Twist", and banks in Europe are even worse off, this ETF has been one of the weakest to date.