The table has been updated. VTINX and MSIQX each got an extra row.

VTINX and MSIQX switched long on 2,7 chart. From now on we'll track additional set of parameters that make these funds whipsaw less.

A confession to make - VTINX and MSIQX

Two of the funds followed in the Current signals - VTINX and MSIQX - hit their respective reversal points last Thursday. Click on the charts below to enlarge.

Had the market held the next day, I would have had to buy the funds on Monday despite my rather bearish outlook on the market. I have to admit, I would have hated having to buy at this time and it would've been difficult for me to execute. It would've felt like throwing money into a fire.

There are two distinct issues we should think about.

1. A natural or, at least, common tendency to try to "outguess" the system: It is a completely psychological issue and we have to learn to resist it. In general, trend following systems have low reliability, meaning, only about 40% of trades conducted according to such systems are profitable. That is a given and it needs to be accepted up front.

2. Testing and adjusting the parameters of the system: The parameters of the system can and should be tested and adjusted as needed. A chart below illustrates this.

VTINX hit 10.73 eight months ago and it is still there. Those who have held, have not made any money, but they have not lost money either. On the other hand, those who executed the signals have actually lost about 1% of this position.

For example, if an investor had 100 shares of VTINX, eight months ago his position was worth $1073. He would then have only $1066 after selling his shares for $10.66 in January - see the arrow Down. He would buy 99 shares for $10.76 - arrow Up in March that he would sell for $10.86 in May. He then could have bought no more than 99 shares at $10.80 or above now if we had got a buy signal.

Also, if this is a 401K or other "regulated" plan, then the investor might have been restricted on how often he is allowed to get in and out of a fund (over-trading rules).

One solution to this issues is to adjust parameters to reduce the number of signals. Here is the same chart with three ATR stops.

Another illustration from the last week is Morgan Stanly International Fund. This is how it looks with our standard 2 ATR 7 week parameters

and this is 3.5 ATR 6 weeks

The table has been updated. Market fell. Bonds inched up.

Two of our funds VTINX and MSIQX were about to signal long, but abrupt and severe drop last Friday kept   us in cash. The only position we continue to hold long is bonds and, of course, cash. "Cash is a position." 

Farrand's "We trend follow"

It is always a pleasure to meet like-minded people or their blogs. In my opinion, Chuck Farrand's We trend follow site is worth spending some time with.

Though I can't agree with everything he says - for example, the idea to go in with 100% of the money at once - he's done a fair job explaining and promoting the trend following approach. Also, he presents a decent plan.

I think there are better methods than the MA cross he advocates, but it simple and it works. We'll discuss it in more details when we get to comparing it with other trend following systems.

I kinda liked his "A simple way that you can become your own financial advisor using the trend following plan developed by Dick Fabian" header.

The table has been updated. Market erased last week loss.

Market jumped up erasing losses of the previous week. Nevertheless, ALL equity funds remain on Sell while we continue holding bonds that went down just a tiny bit this week.

The 401k Fallout

Since this is a blog format, posts are being always sorted in chronological order. I label each post to group them by topic. This one goes into General section.

If you are to watch the video, read this article first to see how different sentiment toward 401K was back in 1997.

The video was broadcastred on April 19, 2009 when S&P was 870. Today, just a little over a year later, S&P stands at 1023 after hitting 1217 just two short months ago. That's a 16% loss in two months.

Comments to the video can be read here and a short interview with Steve Kroft here.

The table has been updated. Reversals have got below Sell.

Market continued its move down, so ALL equity funds remain on Sell while we hold Bonds.

Notice that reversal points also came down this week for all funds (except for MS International MSIQX that did not change much over the last 7 weeks) and now stand at or below the last sell points for most of the funds. In other words, when the market goes up we will be buying back the funds for less than we have sold thus locking at least some profit. This is the goal of following the model - staying in cash when market drops significantly.