Update On The Modified Davis Method

Whipsawed

Frank Roellinger has updated us with respect to the signals given by his Modified Ned Davis Method (MDM) in the course of the recent market correction. The MDM is a purely technical trading system designed for position-trading the Russell 2000 index, both long and short (for details and additional color see The Modified Davis Method and Reader Question on the Modified Ned Davis Method).

The Nasdaq pillar…

As it turns out, the system was whipsawed, which is not a big surprise, as it attempts to minimize drawdowns (and it succeeds quite well at this task). Frank writes:

“My method was whipsawed – it sold 50% of Russell 2000 on Feb. 9 at 1477.84, then repurchased back to 100% on Feb. 16 at 1543.55. As usual I don’t try to make any sense of what is going on fundamentally, but the long term trend still looks intact.  But it can’t last forever and I hope my method will get out and short in a reasonable manner.”

Frank also sent us two updated charts comparing the cumulative return of the MDM to that of the Russell 2000 and the S&P 500 Index in the medium term (starting in 2000) and the long term (starting in 1960). We are not surprised he isn’t overly concerned with fundamental rationalizations. 🙂

Cumulative return of the MDM (white line) vs. the Russel 2000 Index (yellow line) and the S&P 500 Index (green line) since 2000.

Cumulative return of the MDM (white line) vs. the Russel 2000 Index (yellow line) and the S&P 500 Index (green line) since 1960.

A General Remark

We would note that these charts illustrate rather dramatically what a big difference avoiding large drawdowns makes with respect to long-term returns. The buy and hold mantra espoused by some people strikes us as absurd in light of these mathematical certainties. Even a very simple system (such as e.g. using the 200 dma as a demarcation for when to be in or out of a market) is better than having no system at all – despite the occasional whipsaw danger.