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MCI Strategy Overview

Introduction

If this is your first exposure to our strategies, you might be wondering “How is it even possible to get the kind of returns being advertised here?”. We agree. The numbers seem impossible to believe! In fact, if it wasn’t for the extensive backtesting and analysis we’ve done on our strategies, we would be hard-pressed to believe them ourselves. But, facts are facts. The numbers are real. So, the purpose of this article is to explain, in layman’s terms, how it is indeed possible to achieve this level of performance on a sustained basis. We’ll spend some time exploring 4 important concepts that all of our strategies employ, in varying degrees, to produce results that we believe are nothing short of astounding. As you read through the article, we’ll discuss, in a bit more detail, each of these concepts:

  • Diversified Market Coverage
  • Leverage
  • Managed Exposure
  • Compounding

As you learn more about what our strategies do, it’s important for you to understand that we are not just selling some “get rich quick” scheme! We have developed these strategies with the notion that the path to wealth is not a sprint; it is a marathon. They are intended to be used as part of a methodical, emotion-free approach to trading readily available market instruments with superior results. We trade the funds in our corporate accounts, as well as in our own personal accounts, using the exact strategies you’ll see on our website. So, read on to learn more about each of these concepts, and how we use them to create amazing strategies to grow wealth, or as we like to call it - “Technology-Driven Wealth Creation”. Then, if you become convinced that one or more of them is right for you, simply click here to sign up with us and begin your own wealth creation marathon. We look forward to having you join in our success!

Diversified Market Coverage

Even if you’re relatively new to investing, you’ve probably heard it said “It’s very important to have a diversified portfolio of investments”, or the old adage “Don’t put all of your eggs in one basket”. This is sound advice, because proper diversification will tend to provide more consistent returns over a wider range of market conditions. For most people, investing in a variety of mutual funds and/or Exchange-Traded Funds (ETF’s) is a simple way to acheive portfolio diversification. For others, a portfolio of stocks can produce the desired results. Whatever your choice, the key point is that a mix of investments in small, medium, and larger sized domestic and international companies is a good way to achieve reasonable diversification and a more stable portfolio over time. As individual investors, most of us on the MCI team hold a mix of individual stocks, ETF’s, and mutual funds in our personal accounts; we refer to these as “core positions”, and they collectively represent a diversified mix of assets. We also trade using the MCI strategies in our personal accounts. Our corporate accounts are used strictly for trading with the MCI strategies.

Leverage

Our strategies rely on the use of Leveraged Index Funds. So, why do we use these products? There are two main reasons:

  1. The ETF’s that we use track the S&P500, Russell2000, and the NASDAQ market indices, which are very broad-based, so they give excellent diversified (sound familiar?) exposure to the markets in a single investment. For example, the S&P500 consists of 500 different mid-cap and large-cap stocks, and the Russell2000 has 2000 different small-cap stocks in it.

  2. The use of Leverage allows us to amplify our investment returns, which we’ll discuss next.

Leverage is the process of using derivatives such as options contracts and swaps to produce a magnified level of investment return over what is available by investing directly in a particular security. These types of financial instruments are complex and are typically used by professional traders, hedge funds, and institutional investors. Fortunately, the ETF’s we use do this for us, so it’s not really necessary to understand how they actually work. For the purposes of this discussion, this simple explanation should suffice :

Basically, a leveraged ETF such as SPXL, will have an investment goal to acheive (on a daily closing-price basis), some percentage multiple of a particular market index. In the case of SPXL, it’s 300% (3X) of the S&P500 index. So, for example if the S&P500 index moves up 1% on a particular day, SPXL will be up approximately 3% on the day. Conversely, if the S&P500 falls by 1%, SPXL will fall by approximately 3%.

There is a wide variety of leveraged index funds available, but the most common ones offer multiples of 2X,3X,-2X, and -3X of their target indices. The negative leveraged funds will move (on a daily closing-price basis) in the opposite direction of their target index. For example, a -2X leveraged S&P500 index fund would be expected to be up 5% for the day if the S&P500 index was down 2.5% on the day. Negative leveraged ETFs can be useful when the market is in an extended downturn, such as what occurred during 2008-2009. In fact, our very successful HIIT strategy will employ these negative-leveraged ETF’s when market conditions warrant their use.

There is no guarantee that the fund manager of a leveraged ETF will be able to achieve the exact target ratio each day. However, the historical data for these funds shows that generally, their performance is fairly close to their daily target. Significant deviations from the target ratio tend to occur when the daily movement in the index is less than +/- 0.1%. It’s also important to note that these ETF’s are not managed to be an exact multiple of the market index return over any extended period of time greater than one day. For example, if the S&P500 is up 10% over the period of 1 month, SPXL will not necessarily be up exactly 30% over the same time. As an example, let’s take a look at some actual daily closing prices for SPXL compared to the S&P500 closing prices for the same dates:

file

As we see from the data above, over the 41 trading days, the average ratio of the SPXL daily %change to the S&P500 daily %change was 3.0245, which is very close to its target of 3.0. There are days however, where the daily result was higher or lower than the 3.0 target. For example, this was the case on 7/15/2016 when the ratio was 4.57; this was on a day when the market was only down 0.09%, yet SPXL was down by 0.42%. We also note that from the first trading day in the range to the last trading day, the S&P500 changed by 3.37% overall and SPXL changed by 9.70% overall. So, the overall ratio was 2.878. Although this is reasonably close to 3.0, remember that these ETF’s are managed on a daily-close basis, so there is no requirement that it meet the 3.0X value over the longer term.

There are some in financial circles who shun these products, claiming that “they are too risky”. Indeed, they are more volatile than an investment in a 1X index fund, which should not come as a surprise. However, that does not render them unsuitable as an investment vehicle. In fact, it is that same volatility that can be used to our advantage to amplify our investment returns substantially when these products are properly managed within a disciplined trading strategy. The key here is to manage the volatility risk by carefully controlling our market exposure. This leads us to our next topic.

Managed Exposure

When trading higher-volatility products such as SPXL, being in and out of the market at the right time can significantly reduce the volatility risk associated with these investments. One of the metrics we use to assess the performance of our strategies is exposure. Simply put, exposure tells us what percentage of time our strategy is actively invested in the market, and therefore, subject to whatever volatility the market is experiencing. Obviously, you must have some exposure to be able to profit at all from the market’s movement, but how much?. At one extreme, a “buy and hold” strategy, which has a been popular theme for a long time, gives you a 100% market exposure, so you can take full advantage of any gains that occur. However, should the market drop, you are also fully “exposed” to that downward movement. And if you are holding a leveraged product, such as SPXL, that downturn is magnified by approximately 3X. A multi-day market pullback can easily result in a 25% drop in the value of your position. In those circumstances, many inexperienced investors will panic and sell, which will, of course, result in a loss.

Our strategies seek to minimize this possibility by reducing the level of exposure to that which is minimally necessary to obtain a reasonable short-term profit. We do this by designing our algorithms to provide an entry trigger only in cases where the market technical indicators we use suggest, with a high-probability, that a successful trade opportunity is present. Then, once the trade is entered, our algorithms will look for the first opportune time to exit the trade profitably, without over-extending our time in the trade. Two key benefits result from this philosophy:

  1. Because our algorithms “filter” less desirable trade setups, we are statistically more likely to enter a trade that will be profitable.

  2. Once in a trade, we are statistically more likely to have exited from it with a profit, prior to any selloff that might occur.

Both of these benefits lead to strategies with very high probability of win ($P_W$) metrics. We spend a lot of time designing and backtesting them to optimize $P_W$ because a string of winning trades is critical to being able to rapidly compound growth, which we discuss next. We’ll show you how a series of smaller wins can quickly lead to huge profits.

Compounding

Compounding has been referred to as “the eighth wonder of the world”, because of its ability to turn a modest initial investment or series of small regular investments into a large amount of wealth over time. It is an essential component of any winning investment strategy. So, why is it so effective? The simple answer is that it is multiplicative (literally multiplies money). Let’s illustrate this concept with a question a teacher posed to my class when I was in 5th grade:

He asked us: “If I offered to pay you one cent to shovel my driveway (this was in the middle of the winter in New York) today, and then for each day you come back to do it again, I’ll pay you double what I did the previous day, would you be interested?” If you just focused on the one cent, it doesn’t seem like a very good deal. But let’s take a look at what actually happens:

Day “Salary”
1 0.01
2 0.02
3 0.04
4 0.08
5 0.16
6 0.32
7 0.64 (I shoveled this lousy driveway 7 days in a row and I’ve only got $1.27 to show for it?)
8 $1.28
9 $2.56
10 $5.12
11 $10.24
12 $20.48
13 $40.96 (OK, I’m pretty glad I stuck with this!!)
14 $81.92
15 $163.84
16 $327.68
17 $655.36
18 $1,310.72
19 $2,621.44
20 $5,242.88
21 $10,485.76
22 $20,971.52 (I Don’t need to shovel now - I’ll buy a plow!)
23 $41,943.04
24 $83,886.08
25 $167,772.16
26 $335,544.32
27 $671,088.64
28 $1,342,177.28
29 $2,684,354.56
30 $5,368,709.12
31 $10,737,418.24 (OK - Time to retire !)

So, a one month “career” in driveway shoveling with a starting salary of 1 cent leads to early retirement with $21.5 Million in the bank! Now granted, the example we just showed represented a 100% daily return over a period of 31 days, but it does highlight the enormous power of compounding to be able to literally start with 1 penny and turn it into over $21 Million.

When we compound, we reinvest the initial capital PLUS the profits from the trade into the next trade. And that is exactly what we do when trading with our strategies. So, now let’s take a more “real-world” example based on what our HIIT strategy can actually do. The HIIT strategy relies on a more frequent series of short-term winning trades that typically return 2 to 4% profit per trade with approximately a 90% $P_W$ on around 12 to 20 trades per year. (Average losing trade is approximately -2%). The table below shows a series of 14 hypothetical trades over a 1 year period, with 12 winners and 2 losers, for a $P_W$ of 85%. The winning and losing trades are representative of what we achieve with HIIT. You can also look at actual HIIT performance here.

file

Referring to the table, we see that the starting capital of 10,000 turns into 15,342 by way of reinvestment and compounding. This equates to a return of 53.4%. This is a truly outstanding rate of return for a 1 year period. But what makes it even more impressive is that when you look at the backtesting data, it shows that the HIIT strategy was able to sustain this kind of return throughout the entire backtesting period of 27 years! This is why we report Compounded Annual Growth Rate for our strategies – because it is the best indicator of sustained performance over a period of time.

Conclusion

Market Chronologix, Inc. has designed and built some revolutionary strategies for growing wealth based on the concepts of Diversified Market Coverage, Leverage, Managed Exposure, and Compounding. We’ve explained how we fused each of these together to create robust, easy-to-implement techniques our subscribers can use to accelerate their wealth-building experience with very little effort. We invite you to take a look at the individual strategy descriptions for CTB and HIIT to learn more about each of them. Or, if you’re already convinced that you’d like to become a subscriber, just click here to begin the registration process.


Disclaimer: Market Chronologix, Inc. makes a good-faith effort to accurately convey the performance metrics of our strategies, but we assume no liability for incorrect information, or for any losses that may be incurred as a result of using these strategies. Past performance of our strategies does not guarantee or imply that they will continue to perform at the same level in the future. All investing involves a degree of risk. You may have a profit or a loss when you sell shares of an investment, and you should carefully consider what level of risk you can accept before investing any money. We are not registered financial advisers and do not offer investment advice, nor should any of our written materials or services be construed as such.


Copyright © 2018, Market Chronologix, Inc.

Article details:
diversified | leverage | compounding | exposure |