The Power of Price Reaction

The Kelly Letter’s first-quarter signals told us to sell shares of IJR and MVV, and buy shares of TQQQ.

Since our orders filled on April 5, here’s how the three funds have performed:

Price Change Since April 5 Order Fills (%)
– – – – – – – – – – – – – – –

-2.0% IJR
-0.2% MVV
+12.5% TQQQ

This sparked a flood of emails asking about the predictive power of whatever “black box” I’m running.

First, there is no black box. The Sig System is transparent, and simple. At the end of a quarter, we compare our stock fund balance to a growth target. In the case of TQQQ in 9Sig, the growth target is 9%. If the fund has grown more than that, we sell the surplus; if less, we buy the shortfall.

Second, this process is the opposite of predictive: it’s reactive. We never project where prices will go but instead react to where they did go. This obviates needing to guess which guesser will be right in the next time frame, or guessing ourselves. Arithmetic makes a better bedfellow than punditry.

As prices change, analysts offer explanation that usually segues into prediction. However, neither is necessary. It does not matter why prices went where they went, just that they did—insofar as their resulting level affects the arithmetic of reaction. If explanations about past price change don’t matter, then guesses about future price change matter even less.

Price change itself is all you need. It is not predictive and need not be. The future will simply bring more price change, which we will run through a calculated reaction.

Conclusion: Renounce price forecasting in favor of price reaction.

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  1. khalid
    Posted April 14, 2021 at 9:30 pm | Permalink

    just starting with 3sig. not sure which mutual fund to buy. as market is all time high.

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