What are the Objectives of the MMSignal Model?

 

When we develop our model, we always have small investors in mind. We realize that there are a lot of market experts who can make very good buy/sell calls based on their experience and gut feelings. But we want to be independent and objective, as well as be able to maintain continuality no matter how our organization and outside world change. This approach will help investors take their emotions out of the decision making processes. With this said, we believe that our model will always enhance your investing, no matter whether you are a professional investor or an ordinary person who simply watches his/her 401K and IRA accounts. We know that some large institutional investment firms have similar market models that they claim to track/predict the market movements. However, we also know that these models are not for small investors. On Barron’s magazine, once a week we can have a glance on Citigroup’s panic/euphoria index. If you think it is good enough to have an indicator once a week, you can subscribe the Barron’s magazine for about $400 per year. For those who already have access to Barron’s magazine, you will find that Citigroup’s model normally detects the market bottoms/peaks three weeks later after the market moves. An example is shown in “Signal 101”. For small investors, three weeks off in investing time can be crucial. From bottom going up, the first three weeks of a market recovery is normally the strongest, and offers the best opportunities to make some easy money. On the contrary, our MMSignals model detects the peaks/bottoms of the market within three days, either prior to or after the market moves. 

 

Our objectives are to constantly outperform the S&P 500 index. When the S&P 500 index itself has positive returns, we want to have at least 5% more absolute returns. When the S&P 500 index has a negative year, we are still shooting for a positive year with double digit absolute returns. Please note that we do not consider relative return performance acceptable. Mutual funds would brag if they beat the S&P 500 index by some relative return even if they actually lose money, since their loss is less than that of the S&P 500 index. Or they can say that they beat the S&P 500 index by 20% when their return is 6% against 5% from the S&P. By absolute returns, when we say +5% outperform we mean the total return will be 5% plus the return of the S&P 500 index. For instance, in the above example we should earn 5 + 5 = 10%.

 

Who can Benefit from the MMSignal Model?

 

We fairly believe that everyone can. But we believe those investors with the following characteristics will benefit more:

 

1) Have strong desires to take control of their financial futures, and are willing to do a little homework;

2) Are internet-oriented, be able to manage their discount brokerage accounts;

3) Be able to understand the environment we are living in, i.e., our society, our world and major demographic trends;

4) Have basic understanding of how a business is run, with simple math capability to check on business data and to read market charts;

 

Who will Mostly Appreciate the MMSignal Model?

 

We understand that our website and our model are not for everyone. We believe those investors who have experience and realistic expectations will greatly appreciate our model. For many amateur investors, they expect to buy in a stock and watch it skyrocket to the moon. We call them gamblers and our model is not suitable for them. Other amateur investors, on the other hand, simply give up their control on their financial future and let other people manage their fortune. Our model is not for them either, as they blindly put their trust in others and have no desire to work and earn. Our model is especially good, in our opinion, for small investors who are not in finance-related professions and do not have time to watch stocks everyday. Anyone who understands that more than half of the 55,000+ mutual funds cannot even match the S&P 500 index’s regular return and that a fund with 15% plus returns year after year will be ranked in the top 1% of any kind will know the value of our model and appreciate it.

 

What Type of Risk Management Strategy Do We Need with the MMSignal Strategy?

 

First, you should never change your risk management strategy no matter what market indicator you are using. Second, we need to understand that the MMSignals model is developed with a digitalized panic factor. As a result, it is best used to track major index or large ETFs. Please note that the MMSignal for the S&P 500 index (or SPY) is slightly different from that for DJIA (or DIA) and sometimes significantly different from that for NASDAQ (or QQQQ). So you need to follow the MMSignal for the specific index or ETF. When you use the MMSignal for the S&P 500 index, we believe that the best instrument of the MMSignal strategy is SPY, an ETF that tracks the S&P 500 index. If you follow the most conservative approach and simply buy/sell SPY, your assets will either be in a money market fund (or simply in cash) when you follow the MMS index to sell, or in the S&P 500 index when you follow the MMSignal to buy. By doing so, you effectively cut your risk level by at least 50% compared to just holding SPY or a broad market index fund. While your assets are in the market, meanwhile, they are well diversified among the 500 best companies in the world through a single trade. With this said, to safeguard our hard-earned money we should always practice good risk management strategies. Whether you write covered calls, buy protective puts, or set a stop-loss sell order depends on your risk tolerance level. For most investors, however, setting a stop-loss order each time after you buy into SPY is a very good practice. Similar impacts are expected if you use QQQQ by following the MMSignal for QQQQ.

 

If your investment asset is in 401K, you might not have access to SPY. Your best bet then is a stock index fund. While there are many stock index funds run by various fund companies, they all try to match the S&P 500 index. As far as the effectiveness of the MMSignals model, there is no difference from SPY. Your risk will then be that they might be limited on your timing because your order will only be carried out by the end of the day. In addition, many 401K accounts also have restrictions on how long you need to hold the fund before you can move out. In addition to these stock index funds, the MMSignal for the S&P 500 index is also a good indicator for broad-based market funds. Whether they are lagging behind or ahead of the S&P 500 index, their peak/bottom patterns are closely tracking the index. MMSignals does not promote day trades, but it would help if you stay nimble to react to surprises in the market. Nevertheless, with the MMSignals model your risk of exposure will reduce to some extent even in your 401K account.

 

If you do shorts, trade options, etc., you will definitely need your risk management in place. Using the MMSignal model will help your timing but it does not replace your safeguard. As usual, option trading is not suitable for all investors.

 

The MMSignals model is based on the information available, and considers the current and potential market risks. While its value has already factored in the unthinkable events such as a terrorist attack on US soil, it cannot predict when and how the big hit will come upon the financial markets. Please note that our calls to sell in May and July of 2001 were pure luck before September 11, 2001. After the event, however, the MMS index immediately facted the level of fear in its value.

 

How can MMSignals Model Fit into My Investing?

 

Using the MMSignal model in your investing should not change your style. We understand that investing requires a lot of homework and we only intend to help your investing, not to take it over. You are still responsible for your decisions and their consequences. In the chain of investing decisions, the MMSignal model provides an objective trigger and improves your market timing, as described in the section below.

 

Stock Market Investing Basics – STA Approach

 

People get to a stock choice through various means. Some are attracted by the brands of the products a company makes, some are simply buying the company they are working for, and some are led to a stock by a co-worker, friend, or relative. Yet some actually do a lot of home work, i.e., checking a company’s balance sheets and earnings reports, screening through demographical trends leading to preferred sectors, then nailing down to the best of the breed in a hot sector. No matter how they get to this point, the chance is that they most likely go straight to buy in, and probably hold the shares forever, or till they need the cash.

 

Are you one of these people? If so, do not feel bad as you are just one of many millions. This is how the general population is doing their stock investments anyway. But when you think about it, there is a lot of room to improve your investment returns. Simply pause a second and ask yourselves a question here – is a good company’s stock always a good buy? The answer is plainly simple – NO, not at any time. It is true that a good company’s stock performs better than a bad one’s in long term. You deserve to be congratulated if you have chosen a solid company for a long term investment. However, if you pull out a stock chart of any good company in your mind you will see large variations pointing to much better buying or selling prices. Now you will agree that picking a good company is a must but not adequate. If you follow the STA approach after you have nailed down to your stock choices, you will easily see some handy enhancements in your investment returns.

 

STA stands for SETUP, TRIGGER and ACTION. 

 

A setup is the base condition under which you consider a stock is a potential buy. All of your homework so far to nail down a choice of stock from a good sector is a type of setup. You may have got a beaten down company with the stock falling but the brands remain strong; you may have found a rising star with an exploring growth potential, or you may have simply been told that your choice is a great company. Hold on tight here. A setup is NOT an order to action. It is a call for more research. Even if you feel that you have done all your research and determined that this is the stock you want to buy, you need at least look at its technical trend. It is more often than not that an oversold stock becomes even more so, or an undervalued one becomes even more so. It is true that good companies almost always bounce back and outperform others. On the other hand, when they hit a bumper, they may go down more than you think before they finally clear the way to move back up. It takes some time for a large ship to make a turn, as it takes some time for a company, no matter how good they are, to clean the mess and right itself. You do not want to catch a falling knife while it is still in the air. While it is very difficult, if not impossible, to catch it at the moment it hits the ground, it is very practical to catch the knife shortly after it has hit the ground and starts rising. This requires some type of triggers for us to make a good judgment call.

 

A trigger is an event or a group of events that builds your confidence of a solid stock upturn. The turn of the tide is a trigger that the waves in the ocean have gone a different direction. Some technical indicators are useful to determine whether a stock has changed its direction, such as MACD, RSI, Stoch, etc. You can find such indicators in many financial websites, such as in Yahoo! Financial pages of individual stock’s technical analysis. An example link here is the technical page for the SPY, the ETF tracking the S&P 500 Index. If a stock is clearly in an extended down turn, any of such indicators will tell you. You can do yourself a wonder just waiting patiently. You need to have a set of rules to define your own triggers, depending on your risk tolerance level. For instance, you may consider the crossing of the zero line by MACD on its way back up as a trigger if you want to have minimum risk but sometimes you will have to miss the first leg of recovery. Or you may consider the turn of the MACD as your trigger so that you can ride the recovery from the very bottom, even though sometimes this can be a false signal and your stock may fall right back. While these indicators are very useful, they are delayed. The MMSignal is a timely and accurate indicator for the US S&P 500 Index. We also feature specific MMSignals for QQQQ, all nine Sector Spiders, GLD and TIP. If you do not see the indicator for your stock or ETF and want to get more information, please write us at info@mmsignals.com.

 

An action is your actual purchase of the stock or fund, after you have your trigger. The same process should also be applied to the sale of a stock. An overvalued stock can also become more so. Your fundamental research may indicate a stock in your holding is overvalued. It should simply be your setup, a warning that you need to follow this stock and take profit when you have a trigger that confirms the stock price will drop or has started decline. If you follow such a set up to sell before a trigger, you could lose some great return opportunities. An excellent example is when Alan Greenspan warned several times that the stock market was overvalued in the late 1990’s; the stock market actually did not drop rather it went up a lot during that period of time. If you sold your stocks in 1998 (assuming you were in S&P or NASDAQ index funds, for instance), you would have missed a very large run-up. If you followed a simple STA approach, you would have not sold your stocks till after the peak in 2000.  

 

As a summary, successful investing consists of two critical parts of research. The first is that you need to focus on the company fundamentals to nail down a good stock choice. You can do so by spotting a demographical trend, or by learning a new generation of technology or product that has great potential to generate high growing businesses. Then you take actions to invest by setting up your rule of triggers and following the triggers to make purchase decisions. After you have purchased a stock, the follow-up work is equally important. You should continue your research and monitor the fundamentals of the company, and follow your triggers to timely trim your positions or to completely sell all holdings. With regard to the triggers, we strongly believe that the MMSignal will help you to do some wonders in your investing, especially if your choices of investing instruments are major index funds or ETFs.