FAQ 6-Advanced Traders

Why Do you go into Bond Funds rather than Short Funds during Down Signals?

  1. Most down signals are quick (take only 25-35% of the time of an up signal), and the market often whipsaws back up with a large 1-2 day move at the bottom. (The market rose about 7% the day after hitting the March 2009 low!) This makes it difficult to quickly get in/out of short trades and profit on the short side. In my back-testing I found that a majority of shorts either lost money or only achieved about break even – not enough to justify the other down moves that were profitable.
  2. Review the S&P 500 chart from 1990-2010; the only sustained downward moves were 2001-2002 & 2008-2009 – only 4 of the last 20 years.
  3. The market is engineered to go up – there is evidence that the major investment banks & government (google “plunge protection team”) step in to prevent most large market drops.  They often make it painful for those shorting the market, and stimulate short-covering to drive the market higher.
  4. Bond funds often are flat or go up when the stock market is going down (inverse performance). This helps preserve capital – my #1 objective is preserving capital (not losing money), 2nd objective is making money.

Although not for the average investor, I do personally take small short positions for most “Down” indicators & some “Hold-Reduce” indicators – but I use out of the money “put” options or small positions in 3X leveraged short funds. I like the put options because they profit if the market does go down, but I only lose a small amount (the cost of the option) if the market doesn’t go down. I am prepared to lose the entire amount invested in these positions, so I keep the amount at risk small.

Why do you require a confirming move (“higher high” or “lower low”) for some indicators?

Confirmation of the indicator change requires the previous days extreme (low for “DOWN”, or high for “UP” indicators) to be broken at close (or possibly be broken intraday). This approach avoids early signal entry/exit. The market often trends with several consecutive days of lower lows (or a streak of higher highs) – we want to enter the market into one of these trends.

Your indicator seems due for a change but has not yet changed, what will it take to change it?

Our system monitors several price, volume, calendar, & sentiment indicators – some of the indicators are proprietary, some are commonly used on wall street. When there is a consensus among several indicators, an indicator warning is triggered. Typically these indicators are at an extreme reading, make a reversal, and thus trigger the indicator change sequence. These conditions have not yet been met, thus an indicator change has not been triggered. Time is often the enemy of the investor anxious to take action, as the wait for the next indicator can drag on for weeks or months.

How does your indicator work? I’d like to duplicate it for my clients.

My system monitors several price, volume, & sentiment indicators – some of the indicators are proprietary, some are commonly used on wall street. When there is a consensus among several indicators, an indicator warning is triggered. Confirmation of most indicator changes requires the previous day’s extreme (low or high) to be broken at close.

Our system is proprietary so we don’t plan to reveal it, although at times we may highlight components. The publisher reads many books and did 5 years of testing in developing the 401ktrend system; the best source of education on use of multiple indicators (including some we use) can be found in Alexander Elders book, Trading for a Living. (The publisher read it several times and studied it in depth).