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: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Gold Sector: Positioning and Sentiment
      A Case of Botched Timing, But... When last we wrote about the gold sector in mid February, we discussed historical patterns in the HUI following breaches of its 200-day moving average from below. Given that we expected such a breach to occur relatively soon, the post turned out to be rather ill-timed. Luckily we always advise readers that we are not exactly Nostradamus (occasionally our timing is a bit better). Below is a chart of the HUI Index depicting the action since the January...
  • India: The next Pakistan?
      India’s Rapid Degradation This is Part XI of a series of articles (the most recent of which is linked here) in which I have provided regular updates on what started as the demonetization of 86% of India's currency. The story of demonetization and the ensuing developments were merely a vehicle for me to explore Indian institutions, culture and society.   The Modimobile is making the rounds amid a flower shower. [PT] Photo credit: PTI Photo   Tribal cultures face...
  • The Long Run Economics of Debt Based Stimulus
      Onward vs. Upward Something both unwanted and unexpected has tormented western economies in the 21st century.  Gross domestic product (GDP) has moderated onward while government debt has spiked upward.  Orthodox economists continue to be flummoxed by what has transpired.   What happened to the miracle? The Keynesian wet dream of an unfettered fiat debt money system has been realized, and debt has been duly expanded at every opportunity.  Although the fat lady has so far only...
  • Welcome to Totalitarian America, President Trump!
      Trump vs. the Deep State If there had been any doubt that the land of the free and home of the brave is now a totalitarian society, the revelations that its Chief Executive Officer has been spied upon while campaigning for that office and during his brief tenure as president should now be allayed.   Image adapted from the cover of “Deep State #5” - depicting an assassin from the future   President Trump joins the very crowded list of opponents of the American...
  • March to Default
      Style Over Substance “May you live in interesting times,” says the ancient Chinese curse.  No doubt about it, we live in interesting times.  Hardly a day goes by that we’re not aghast and astounded by a series of grotesque caricatures of the world as at devolves towards vulgarity. Just this week, for instance, U.S. Representative Maxine Waters tweeted, “Get ready for impeachment.”   Well, Maxine Waters is obviously right – impeaching the president is an urgent...
  • Boosting Stock Market Returns With A Simple Trick
      Systematic Trading Based on Statistics Trading methods based on statistics represent an unusual approach for many investors. Evaluation of a security's fundamental merits is not of concern, even though it can of course be done additionally. Rather, the only important criterion consists of typical price patterns determined by statistical examination of past trends.   Fundamental considerations such as the valuation of stocks are not really relevant to the statistics-based trading...
  • Searching for Truth
      Heresy or Truth? RANCHO SANTANA, NICARAGUA – In the fifth century, Christian scholars counted 88 different heresies. Arianism. Eutychianism. Nestorianism. If there was a way to “offend” God, they had a name for it. One group of “heretics” argued that there was no such thing as “original sin.” Another denied the trinity. And another claimed Jesus was not divine. Which one had the truth?   Depiction of the first Council of Ephesus in 431 AD, convened by Emperor...
  • Why the 21st Century Sucks - Turtles All the Way Down
      A Truly Sucky Century BALTIMORE – What an awful century! Worst we’ve ever seen. Household incomes are down. Employment is down, with 7 million people in the U.S. of working age without jobs. Productivity growth is down. GDP growth is down – to only about 0.5% per capita last year. Even life expectancies are down. Drug overdoses are up. Suicides are up. One out of every eight children lives in a family getting food stamps. One of out every eight adults takes psychoactive drugs...
  • Gold and the Fed's Looming Rate Hike in March
      Long Term Technical Backdrop Constructive After a challenging Q4 in 2016 in the context of rising bond yields and a stronger US dollar, gold seems to be getting its shine back in Q1. The technical picture is beginning to look a little more constructive and the “reflation trade”, spurred on further by expectations of higher infrastructure spending and tax cuts in the US, has thus far also benefited gold. From a technical perspective, there are indications that the low at $1045.40,...
  • The Unstable Empire – A Campfire Tale
      Campfire Tale   Caesar: The Ides of March are come. Soothsayer: Ay, Caesar, but not gone. — Julius Caesar, Shakespeare   GRANADA, NICARAGUA – Today, we stop the horses and circle the wagons. For 19 years, we have been rolling along, exploring, discovering. We began with the assumption that we didn’t “know” anything - so we kept our eyes open. Now we know even less.   Famous people who knew nothing and were not shy to admit it: Sergeant Schultz...
  • Off the Beaten Path in Mesoamerica
      Greeted by Rooster There’s an endearing quality to a steadfast rooster call at the crack of dawn when overheard from a warm country farmhouse.  There’s a reassuring charm that comes with the committed gallinaceous greeting of daybreak that’s particularly suited to a rural ambiance.  The allure of a morning cock-a-doodle-doo somehow falls flat in all other settings.   Good morning everyone! Before meteorological forecasts were available on TV and smart phones, people...
  • Why Silver Went Down – Precious Metals Supply and Demand
      Rumor-Mongering vs. Data The question on the lips of everyone who plans to exchange his metal for dollars—widely thought to be money—is why did silver go down? The price of silver in dollar terms dropped from about 18 bucks to about 17, or about 5 percent.   Reportedly silver was already assassinated in the late 19th century... so last week they must have assassinated its corpse. [PT] Illustration taken from 'Coin's Financial School'   The facile answer is...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

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]

 

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

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com