Timing Maximum Midcap

Andrew wrote:

Your Maximum Midcap strategy has made a lot of money for me in my retirement account. I follow the advice in your book and keep buying each month no matter what the news, and that’s been a good way to cut down on stress and just wait for recoveries. So, thanks.

But I’d like to do better. Have you ever looked into timing strategies that use Maximum Midcap as the vehicle?

Yes, I have and with quite a bit of luck with one in particular.

Using standard deviations, moving averages, exponential moving averages, and other mainstays of technical analysis has not done much to improve the results of a simple dollar-cost averaging strategy, which is the one I suggest in the book and that Andrew mentioned. The improvements, when they happen at all, are not enough to to justify the extra hassle of needing to watch closely and take action at the ever elusive exact right moment.

What has shown some promise is using Gerald Appel’s standard MACD. Since early 2000, whenever Maximum Midcap’s standard MACD has dropped below -1.5, it has been a pretty good time to look for a bullish crossover divergence and invest in the strategy or increase the amount you invest.

Let’s look back.

12/11/00 – 4/4/01 saw Max Midcap drop 39%. The standard MACD was -1.64 and made a bullish crossover within a few days. By the time the MACD reached +1.33 and showed a bearish crossover on May 25, Max Midcap had risen 47%.

5/21/01 – 9/21/01 saw Max Midcap drop 48%. This period included 9/11 and saw the worst MACD reading ever shown for the strategy. The standard MACD hit -2.47 on Sept. 26 and made a bullish crossover on Oct. 2. By the time the MACD had reached +0.59 and showed a bearish crossover on Dec. 3, Max Midcap had risen 23%.

Here, there was a problem. MACD gave unclear signals and by mid-April 2002 missed out on an additional 27% gain. That’s a lot to miss. The good news is that it kept timers out of the plunge to come.

4/17/02 – 7/23/02 saw Max Midcap drop 47%. The standard MACD reached -2.16 on July 25 and made a bullish crossover on July 29. It was an unimpressive 8.8% run higher through Aug. 21, though, and the bearish crossover indicating time to sell didn’t happen until Sept. 3, by which time Max Midcap had lost 5.7% from the July 29 buy.

However, that’s a lot better than the 47% drop from the time period prior, and better than the drop to come.

9/3/02 – 10/9/02 saw Max Midcap drop 26%.

From here, I want to change the parameters of research to just pivotal moments because it’s tedious for you to read through every little blip up and down.

The standard MACD did not deliver a strong buy signal at the single best buy moment of Max Midcap’s history, which is disappointing. March 12, 2003 was the strategy’s cheapest day ever and the MACD got down to only -0.52 with no bullish crossover. It did provide signals to help get timers in for a good portion of the +143% gain over the following 12 months, but not the full run.

Not until June 2006 did we see a deeply negative MACD, due mostly to the raging bull market and Max Midcap’s riding it. On June 14, 2006 the standard MACD reached -1.92 and made a bullish crossover on June 22. In the next 12 months, Max Midcap gained 37%.

On Aug. 16, 2007 the standard MACD reached -2.36 and made a bullish crossover on Aug. 21. Max Midcap gained 12% by Oct. 16 when a bearish crossover happened.

On Nov. 27, 2007 the standard MACD reached -2.03 and made a bullish crossover on Nov. 29. It was a bad one, though. Since then, the strategy has been up, then down, then up, then down a lot to yesterday’s close, 17% lower than on Nov. 29. The MACD did issue some sell signals along the way, but the bullish and bearish crossovers were too finely cut and too close together to form much conviction.

As of yesterday, the standard MACD is at -2.29 and has yet to make a bullish crossover. As you can see from this compressed history, however, an MACD that low usually signals a recovery on the way.

That’s consistent with my market outlook based on where we are in the Fed’s interest rate easing cycle and the valuation of the stock market versus bonds.

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