Switching from Long to Short

The modified Ned Davis stock market timing model developed by Frank Roellinger has given a sell signal at the end of last week. Readers who aren't familiar with this trading system should take a look at Frank's article introducing it, which we published in late 2013: “The Modified Ned Davis Method” (MNDM).

This mechanical trading system is focused on the Russell 2000 Index and has been extensively back-tested. We have followed it since Frank first informed us about it and it has proven to be astonishingly accurate in the bull market cycle since the 2009 low. To be sure, it has only very rarely issued new signals – most of the time it simply stayed 100% long (which has hitherto been the correct stance). A brief sell signal was given when the market swooned last year, but was quickly reversed again on October 24.

Click on picture to enlarge

The Russell 2000 Index, weekly, over the past 8 years, via StockCharts

Two days ago, Frank pinged us about the most recent signal change. Given that the system has been highly accurate thus far, we want to continue to keep our readers updated on signal changes. The current signal is both an exit signal for the long position entered into last year and at the same time represents the initial switch from long to short. As Frank writes:

“My method exited the 100% long position in Russell 2000, purchased on 10/24/14 at 1118.82, last Friday (08/07/15) at 1206.90 for a gain of 7.87 %. IWM with dividends reinvested made 9.14%, according to Yahoo figures. This exit also was a signal to go 50% short.”

Conclusion

In light of the deteriorating market internals we recently discussed, we regard the sell signal issued by the MNDM system as further confirmation that a great deal of caution is currently warranted. Note that this is not a recommendation to short the market – everybody needs to do his own due diligence with regard to that – we are merely informing readers that a signal change has occurred and what it consists of.