The Modified Davies Method Suggests the Time is Close

[Comment by PT: Readers not familiar with Frank’s MDM trading system should check out these previous articles on the topic: Modified Davies Method and Reader Question on the MDM. Technical analysis generally has the problem that the data of the past as such cannot really tell us anything about the future. However, data like market internals do tell us something about the degree of investors’ risk appetite, resp. risk aversion and how they are changing over time. Such information is often useful as an early warning indicator of impending trend changes. A side note: the MDM is solely focused on the Russell 2000 Index.]

Probably the most difficult thing to do in stock market investing is to identify a good time to sell. Many technical indicators have been devised to identify lows around the time they occur or soon thereafter, with a moderate degree of success, but to my knowledge that has not really happened for tops.

 

$RUTThe Russell 2000 Index (RUT) and the S&P small cap advance/decline line over the past year – click to enlarge.

 

My own Modified Davis Method does not do a very good job at this either. It does profit on the short side, but on balance just barely. In fact, were it not for the occasional severe bear market when my method will be short, or at most 50% long and thus leave significant funds at one’s disposal to invest near the beginning of the next bull market, it probably would not do any better than buy and hold over the long term.

But I have discovered a tendency which I think is nice to know, based on the length of the breadth divergence period preceding the signal to go short. Attached is a list of all of the short trades in the forward test, arranged by number of consecutive weeks of divergence in effect at the time of the signal.

It appears that the divergence must be in place for at least 13 weeks to have a good shot at a successful short. In particular, it also appears that there is a “sweet spot” from 41 to 79 weeks.

There, the probability of a profitable short trade has been 0.80. Over the entire period under consideration there were 5 shorts that resulted in double-digit profits, and 2 of them occurred in this interval. Beyond 79 weeks the probability of success declines significantly. Bear in mind that the method shorts at the 50% level, so these figures would be doubled if it shorted at the 100% level.

Overall there does not seem to be anything here that could be incorporated into the algorithm, and even if it could, that obviously could not be considered as part of the forward test. The only thing to do is to take every short as it comes, as one never knows for certain when “the big one” will begin.

At the last short signal (12/11/15), a divergence had been in effect for 31 weeks. At the time of writing, the figure is 33 weeks, and it will take a very strong market to end this condition. The current short position may not end profitably, but the next short may have a good chance of taking place in the above mentioned 41 to 79 week sweet spot.

 

List of all MDM short signals since 1969 and their results. Ordered by the duration of the breadth divergence preceding the signal (“sweet spot” periods underlined):

 

Short                                Consecutive weeks

Beg Date           Result         of divergence

========   ======   ==============

2002/05/10       9.82 %       1 week.

1991/11/22       -4.18 %       2 weeks.

2006/05/19       -0.14 %       3 weeks.

2007/07/27       -0.70 %       3 weeks.

2014/07/18       -0.99 %     3 weeks.

1976/04/15       -0.80 %     4 weeks.

2004/04/30      -0.76 %     4 weeks.

2005/08/26       -2.27 %     4 weeks.

2014/09/26       0.02 %     4 weeks.

1987/04/24       -1.73 %     5 weeks.

1996/06/21         2.39 %     5 weeks.

1978/10/20       0.77 %     6 weeks.

1995/10/27       -2.55 %     6 weeks.

1998/05/29       -0.15 %     7 weeks.

1983/08/12       1.29 %     8 weeks.

1989/10/13       2.39 %     8 weeks.

1986/07/25       1.06 %     9 weeks.

2006/07/14       -2.23 %     11 weeks.

1980/12/12       -2.54 %     12 weeks.

2015/08/07       1.72 %     13 weeks.

1998/07/24       8.59 %     15 weeks.

2007/10/19       4.27 %     15 weeks.

1972/06/09       1.72 %     19 weeks.

2002/09/20       0.54 %     20 weeks.

1976/08/20       -1.38 %     22 weeks.

1981/02/20       -2.80 %     22 weeks.

1962/04/27       8.53 %     25 weeks.

1979/03/02       -2.54 %     25 weeks.

1998/10/02       0.99 %     25 weeks.

1976/10/08       -1.15 %     29 weeks.

1987/10/09       14.00 %     29 weeks.

1986/12/26       -4.16 %     31 weeks.

2002/12/13       1.51 %     32 weeks.

1984/02/03       3.05 %     33 weeks.

2008/02/22       -1.32 %     33 weeks.

1979/05/11       -2.47 %     35 weeks.

1990/04/27       -2.40 %     36 weeks.

1981/07/02       7.27 %     41 weeks.

1999/02/12       -2.90 %     44 weeks.

1962/09/21       1.20 %     46 weeks.

1990/07/27       7.02 %     49 weeks.

1973/01/19       10.62 %   51 weeks.

2008/06/27       -0.87 %     51 weeks.

1966/05/06         7.95 %     52 weeks.

1979/10/12         0.40 %     57 weeks.

2008/09/26     11.87 %   64 weeks.

1982/01/08         4.57 %   68 weeks.

1984/10/05       -0.32 %   68 weeks.

1999/07/30         0.27 %   68 weeks.

2008/11/07         3.23 %   70 weeks.

1980/03/07         4.23 %   78 weeks.

1988/09/23         0.12 %   79 weeks.

1973/08/10       -0.60 %   80 weeks.

2009/01/16       -0.46 %   80 weeks.

1980/04/18       -2.57 %   84 weeks.

2009/02/13         6.16 %   84 weeks.

1982/05/28         2.64 %   88 weeks.

1973/11/02         6.02 %   92 weeks.

1991/07/05       -2.33 %   98 weeks.

2000/03/17         8.08 %   101 weeks.

1974/01/11       -2.24 %   102 weeks.

2009/07/02       -2.21 %   104 weeks.

2000/05/12       -2.25 %   109 weeks.

1974/03/29         4.55 %   113 weeks.

2000/07/28       -2.58 %   120 weeks.

1974/06/21      10.13 %   125 weeks.

2000/09/22     1.07 %   128 weeks.

2000/11/10     0.19 %   135 weeks.

1974/10/04     -5.90 %   140 weeks.

2000/12/15     -2.78 %   140 weeks.

2001/01/05     -2.44 %   143 weeks.

1968/02/09     -1.34 %   144 weeks.

1974/11/22       0.53 %   147 weeks.

2001/02/23     1.12 %   150 weeks.

1968/08/02     -3.37 %   169 weeks.

1969/02/20     0.43 %   198 weeks.

1969/06/06     6.18 %   213 weeks.

1969/11/21      15.93 %   237 weeks.

1970/06/26    -1.25 %   268 weeks.

1970/08/14     -4.64 %   275 weeks.

1970/10/23     -0.71 %   285 weeks.

 

Chart by: StockCharts

 

Frank Roellinger is a retired software engineer who worked for a major computer manufacturer for nearly 34 years. He has been an avid follower of markets for more than 30 years, with a strong preference for technical over fundamental analysis. After observing the results of many different ways to approach markets, he settled upon long-term trend following. He once hoped to develop a mathematically-based model of the stock market, but now sees little point in doing that, as his Modified Davis Method works as well as any other purely mechanical method that he thought he might ever find.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...
  • Getting High on Bubbles
      Turn on, Tune in, Drop out Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD).   Dr. Albert Hoffman and his famous bicycle ride through Basel after he ingested a few drops of LSD-25 by mistake. The photograph in the middle was taken at the Woodstock festival and inter alia serves as a...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist