Interested In A 100%+ Annual Rate Of Gain 7 Times Out Of 8, With Worst-Case Risk At -10%?

Jul. 2.14 | About: Direxion Daily (MIDU)


That’s what Mid-Cap ETF MIDU has offered for over 5 years, at any of 1350+ starting days.

But not on a buy-and-hold basis. You have to be an active manager to earn the excess return reward of +75% above the ETF’s trendline growth at +25% a year.

The discipline needed to excel has been publicized for over two years, right here on Seeking Alpha.

How badly do you want odds-on, really good equity investment returns? Bad enough to become an active investor and forget how badly you may have been misled to date?

Check out MIDU focus articles here on Seeking Alpha

It's easy to do. Go to the Home tab at the left-top of almost every SA page. Then in the search window at the top right of the home page enter MIDU.

What I found to my amazement was that there were NO focus articles on Direxion Daily Mid-Cap Bull 3X Shares (NYSEARCA:MIDU), an Exchange Traded Fund. And only "251 people get MIDU breaking news and analysis by email alert."

How many other equity investments have this kind of a 5-year buy-and-hold record?

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When I last checked, 1,000 times as many SA readers "get AAPL breaking news and analysis by email alert." From the same starting date up to today, both MIDU and AAPL wind up at the same accumulated wealth over 5 years.

Why is MIDU unloved and unattended? Ignorance of reality, probably. Besides, MIDU doesn't sell electronic toys.

But so far this article has only illustrated comparisons using an inferior investment strategy, buy-and-hold.

The bullet-point introduction suggests that a more effective investment discipline can multiply the buy & hold results by as much as 4x, and shockingly, do it at less risk. Still, that takes the mental effort (perhaps quite disturbing for many) of rejecting what has been "learned" (actually well-peddled by the investment business) over many years.

A strange thing about risk: It only exists for you while you expose yourself to it. If you cross the busy highway at a traffic light, green for you, you minimize your risk (perhaps to that of being hit by a DUI perpetrator). If instead, midway between lights, you decide to save steps and cut across on foot, you take on risk you didn't have before. Maybe your very last steps get wasted.

A buy-and-hold investor, as a matter of chosen policy, is always exposed to the price change risks inherent in his investments. An active investor seeks out the safer crossing points and may greatly reduce his risk exposure. Often that risk reduction is rewarded by the avoidance of price drawdowns that would otherwise subtract from his/her cumulative score. The kind of subtractions built into B&H.

So the active investor needs to see the traffic lights. Here is how the most active of all professional investors, the market-makers [MMs], have been seeing MIDU's traffic, according to "their lights":

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(used with permission)

First, for those new to a Block Trader Forecast [btf] picture like this, the vertical lines are price range forecasts of likely coming prices, not historical records of past prices so common to most stock "charts." The forecasts are implied from the self-protective hedging actions taken by the market-makers as they must expose firm capital to market risk in order to "fill" orders by their big-money portfolio-manager fund clients.

Each of those price range forecast bars are separated into implied upside and downside price change prospects by a heavy dot of the end-of-day market quote at the date of the forecast. The separation has a measurement label we call a Range Index [RI] that tells what proportion of the whole range lies below the current quote. The smaller the RI, the larger is its upside prospect.

Pursuing the traffic light analogy used above, those vertical bars with very low RIs are in green, those with very large RIs are in red, or yellow. Just in case you don't get the idea, this may not be a good moment to step into the "street" to pick up some MIDU.

So, when is a good time? It's always easy to tell when it was a good time, as the green bars show. If they were produced by looking back in time, (data mining) your attention is being wasted. They were not. They were produced by looking forward in time, just like all the expectations being pictured here, and 5+ years worth of prior days over the entire lifetime of the MIDU ETF.

A quick study of the above picture should make it clear that the RI value may have some price change forecasting properties, at least as far as MIDU is concerned. Here is a scatter plot of MIDU's Range indexes over the past 5+ years, at the dates they were forecast, and the actual subsequent price changes available to a simple standardized active management discipline.

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Every dot above the horizontal 1.00 line is a day where a profit could have been earned by the discipline, and every dot below is a loss experience. The .00 of the scale is a decimal percent change from the closing price cost of the day after the forecast day to the day called for ending the investment, by the active investment discipline.

The rules are very simple. Set the upper end of the day's forecast as the sell target, and on the first subsequent day that it is reached, close out the position. If that has not happened by 3 months (63 market days) after the forecast day, close the position out and record the gain or loss. In each closeout case, reinvest the proceeds immediately in the next acceptable investment choice available to keep your capital actively employed.

The record of the positions pictured in the scatterplot above is a total of 1355 separate experiences, 144 of which incurred losses, and the other 89% produced gains. The (geometric) average net gain was +5.7%, earned in a typical holding period of 22.1 days. Separately, that calculates to an average of +88.0%, and if compounded through the whole time period, produces an annual rate of 104%. Either is significantly above MIDU's trendline growth of +25% per year, AAPL's +29% per year, or SPY's +14%.

So much for return, how about risk?

Our Time-Efficient standardized sell discipline keeps track of the worst-case price drawdown from investment cost in each experience. Those are then averaged to get a sense of typical stress the investor is likely to encounter in following the discipline, since it requires maintaining each investment until target or time limit is reached. For those without the discipline, worst-case price drawdowns are typically the most likely points in time and the worst possible prices at which to make the mistake of accepting (locking in) a loss. For us, they represent the real measure of risk. Price drawdowns during periods outside the actual holdings are like those between the traffic lights. If you're not in the street, you're not at risk.

Unfortunately, buy-and-holders are at risk all the time.

What was the B&H risk of worst-case price drawdown for an AAPL holder from September 2012 to June, 2013? From $100.30 to $56.25, a loss of $44 (44%), which it takes a gain of +78% to make back up. And somehow, after over a year, we aren't quite there yet.

The average worst-case "while in the investment street" risk of MIDU was a -10%. Which takes +11% to make up.

Now, let's look at the odds for gain in each vehicle. MIDU had wins in 89% of its daily experiences, better than 7 out of 8 (87.5%); AAPL won 76% of its daily adventures in exactly the same time stretch as MIDU, or a bit better than 6 out of 8.

If 2 out of 8 have losses as large as the average wins of the other 6, that leaves 4 winners to pull the wealth-building load of the 8. The same deal with a 7 out of 8 wins proposition leaves 6 winners to build wealth, instead of only 4. Which game would you rather play?


What game to play right now depends much more on what the prospects are right now than on what may have happened in the past. Right now the investment community's best-informed and best-resourced professionals are saying "watch out" for MIDU, in as clear a tone as we know how to hear. Best to not go there now, but for sure, keep it in mind to check out as conditions and prices evolve. It can produce good wealth-building results.

What is the best alternative now? That's for another article, another day.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.