Q:
DR. K,
I have been disciplined about following your UVXY reports since last Sept. 5th. Since we are coming up on the first anniversary, I wanted to tell you my experience, for whatever value it is to you.
The only word I can use to describe the upside results from UVXY is "spectacular." I doubled my initial investment in a couple of months last fall, as did your posted results, and then I have had two 50% gains on your signals using 2x XIV. By my calculation that is a 450% return. That may be a "yawn" to you and Gil but I consider it incredible.
On the downside, I took a 70% tumble from my high point after I doubled my investment last fall. I know your posted results were in a similar ballpark. I also round-tripped on one of my 50% gains and actually ended up in the red before you switched signals. With those two events, I am down about 20% from where I started.
AS QE hopefully ends before too long, perhaps stocks will return to giving more accurate cues. If QE ends I am thinking both the UVXY and the MDM will perform better as the cues become more reliable. Can you say anything encouraging about how the end of QE might improve the downside results of UVXY without harming the upside results too much? Since the UVXY is your baby, I know nobody is looking forward to the end of this mess more than you are.
Thanks, Russ
A:
Russ,
Thanks for your note. Based on what I've observed, and while there are no guarantees, I am expecting UVXY to perform very well as market manipulation by way of QE starts to taper then comes to a close. I am also expecting this of the Market Direction Model given its long standing track record.
In the meantime, brief windows of profitability may open as they did in 2011, a year that was fairly trendless and volatile, evident by the trend following wizards who well underperformed the major markets that year and ever since with the group collectively down for 2013 year-to-date: http://www.automated-trading-system.com/resources/trend-following-wizards-fund-performance/. Those tracked on this wizards page have decades of successful track records (some managers approaching half a century such as Millburn or Campbell, founded in 1971 and 1972 respectively, with other pioneers following suit a few years later: Sunrise, John W Henry, Dunn, etc.).
When some members threw in the towel in mid-2011 after a choppy, trendless market, the MDM had a series of highly profitable signals starting in August 2011, with the UVXY model up well into the triple digit percentages, though these results came at too much risk, so the results which were purely experimental, call it pre-beta, were shelved. I then dialed down the risk but the reward was unfortunately reduced as well, so after a few more intensive studies, a new, retooled UVXY model began on September 5, 2012.
The first few signals went great, with the UVXY more than doubling its performance in just over 2 months. But since then, the market has been about as difficult as Gil and I have seen in our 20+ year careers, and the UVXY's and MDM's underperformance is indicative of this unprecedented environment. The UVXY model had a sell signal on December 12, 2012 which led to severe losses over the ensuing months. Note, the nature of highly volatile instruments such as UVXY is if the major markets lose, say, 1.0-1.5%%, UVXY could easily lose 10-15%.
Then with the MDM, starting on February 25, 2013 with the MDM's unprofitable sell signal, the MDM has only been up minimally in 2013 while the major averages continue to move higher but in a manner that is one of the most difficult from which to profit, as leading stocks often drop to the selling point resulting in losses. Ironically, MDM as measured by buy/cash/sell signals on the NASDAQ Composite and ETF TECL are outperforming the trend following wizards as a group, but both MDM and the wizards are underperforming the general markets in this environment. So while NASDAQ Composite and S&P 500 are up this year, performance among some of the best in the business including the trend following wizards have been poor, with the wizards down so far in 2013.
That said, windows of opportunity can open when least expected. This has been true time and time again including October 1998, October 1999, April 2003, September 2006, and a number of other cases. So we keep a close eye on markets so we are prepared and can diligently inform our members in real-time of potential opportunities.
Fortunately, such periods always come to an end. We remain ever vigilant and patient for the next major profit opportunity as such directives have paid off handsomely in the past.