San Diego VectorVest Group Analysis of Hal Miller’s MTI / Rydex Method for “Riding the San Diego Wave (Rollercoaster)” Scott Olmsted San Diego VectorVest Group November 23, 2002

For a copy of these slides (minus MTI chart), email request to: scottolmsted@yahoo.com Based on Hal’s Sept talk Took up Hal on his challenge to investigate for myself I’m a software engineer and computer programmer Wanted to reduce the rules to instructions the computer understands and let it make all the decisions--a totally mechanical system

Rydex Dynamic Funds “The Titan 500 Fund seeks to provide investment results that correspond to 200% of the daily performance of the S&P 500 on a daily basis” Titan / Tempest : 200% of S&P 500 Index Velocity / Venture: 200% of Nasdaq 100 Index Account Minimum: $25,000 Can trade any $ amount, leave the rest in Money Mkt Two trades per day: 11:00 AM Eastern (10:30 cutoff) 4:00 PM Eastern (3:55 web site cutoff) Opened three small accounts ($16,000, $3,000, $1,100) in addition to two funds each over $25,000 totalling over $100,000.

ProFunds UltraBull / UltraBear : 200% of S&P 500 Index UltraOTC / UltraShort OTC: 200% of Nasdaq 100 Index Account Minimum: $15,000 One trade per day: 4:00 PM Eastern (3:55 web site cutoff) UltraBull and UltraBear seem to behave much like Titan and Tempest.

Intermediate Tops and Bottoms Low Top

Hal Miller’s MTI Rules: Trends IT (Intermediate Top) MTI >= 1.65, MTI decreases, RT does not increase Trend --> DOWN IB (Intermediate Bottom) MTI <= 0.47, MTI increases, RT does not decrease Trend --> UP LT (Low Top) Trend is UP, MTI declines 0.18 and is also below 1.0 Position: UP: Long DOWN: Short Slightly different rules in Hal’s talk

Hal Miller’s MTI Rules: Countertrends DOWN Trend If MTI rises 0.21 from most recent low and is below 1.3: Short --> Long If MTI above 1.3 : Stay Short! If MTI falls 0.02 from most recent high: Long --> Short UP Trend If MTI falls 0.18 from most recent high: Long --> Short (Trend changes if MTI below 1.0) If MTI rises 0.02 from most recent low: Short --> Long

When was the Recent High? When was the Recent Low? Question: MTI makes lots of ups and downs, so which high (or low) are we to use? Answer: the high or low at the last reversal of position This may not appear to be a problem, but when I went to program it into Excel, it gave me more trouble than any other part

All Decisions Made In The Spreadsheet Took quite a lot of work to get this working (I think) correctly Uses the rules exactly as you do trading: Signal comes in the evening Trade the next AM if reversing position Calculate both AM and PM equity values, using the published AM and PM share prices from Rydex

Measures of Interest Rate of Return: Daily, Monthly, Annual Drawdown Profile Average and Maximum Drawdown Frequency of Trades Our “Edge”: Percent Winning Days Average Gain, Average Loss Percent Days That Hit New High Rate NOT same as gain because of compounding What is drawdown? What is Maximum Drawdown? Hard question--how much drawdown can you endure before bailing out? Depends on the rate of return you expect New High = 0% Drawdown

Results with Titan / Tempest 587 Trading Days 7/18/2000 to 11/20/2002 Rate of Return: Daily Monthly Annual 0.381% 8.1% 97.2% Average Drawdown 5.0% PM Maximum Drawdown 28.0% PM (23.5% AM) Number of Trades 24 Average Days To Switch 24.5 Average Days To Double 187 Winning Days 55.5% Average PM Gain 2.45% Average PM Loss 2.01% New High Days 20% Short Days 60% NOT Hal’s favorite funds -- he likes the Nasdaq

Log or proportional scale Goes from $1000 to just $10,000 in 28 months How can it do that if its rate of return is about 100%? -- Compounding! Is a rollercoaster! -- has its ups and downs

Slightly more “pinched” than a Gaussian bell-shaped curve, more outliers Point out 55%winning days 1 day in 20 gain > 5% 1 day in 30 loss > 5%

Note that 1 day in 10 our drawdown > 12% (compare later to the other funds)

Results with Ultra Bull / Ultra Bear 586 Trading Days 7/17/2000 to 11/20/2002 Rate of Return: Daily Monthly Annual 0.311% 6.5% 78.5% Average Drawdown 4.9% PM Maximum Drawdown 34.1% PM Number of Trades 24 Average Days To Switch 24.5 Average Days To Double 231 Winning Days 53.8% Average PM Gain 2.41% Average PM Loss 2.05% New High Days 17% Short Days 60% 78.5% versus 97.2% with Titan / Tempest, almost 20% lower by not being able to execute that morning trade Later ==> the main reason why

Results with Velocity / Venture 587 Trading Days 7/18/2000 to 11/20/2002 Rate of Return: Daily Monthly Annual 0.591% 12.4% 148.9% Average Drawdown 12.9% PM Maximum Drawdown 63.0% PM (59.2% AM) Number of Trades 24 Average Days To Switch 24.5 Average Days To Double 121 Winning Days 55.2% Average PM Gain 5.16% Average PM Loss 4.83% New High Days 17% Short Days 60% Numbers don’t match Hal’s exactly slightly different dates / different rules 63% Drawdown is likely more than even Hal could take!

Big rollercoaster!

More deviation from a Gaussian bell-shaped curve Still 55% winning days 1 day in 20 gain > 10% 1 day in 20 loss > 10%

Comparing Titan / Tempest and Velocity / Venture Equity Curves Velocity / Venture slope about 50%higher -- due to its average rate of return 50% higher One 3-month rough spot: T/T drawdown 20%, V/V drawdown 63% T/T worst drawdown of 28% was in 2002 6 month period when Titan / Tempest almost flat, while Velocity / Venture doubled Best performance usually in last part of a down wave: if you won’t go short, you’re missing out! Always gives up something at the turns, especially at the bottom: Suggest reversing when S&P or Nasdaq reverses, or at least go to cash AND this is why not having the morning trades with Profunds is so costly--the market is going against you and you have to wait the whole day to reverse

Things That Make Me Uneasy “Sharp edges” in Trend rules Relatively few cycles Parameters optimized for this period No test or “out of sample” data “Shrinkage” Sharp edges: Example: what if the MTI goes only to 0.48 and then makes a sharp turn? Lots of data points, but relatively few cycles (5, maybe 6 -- about as many as the Elliot Wave followers have for major cycles) Parameters optimized: Confirmed that changing the parameters away from the number Hal gave generally produces a lower return. Maybe it works in this period only because we adjusted the parameters to this period and it won’t work in other periods, or at least not as well. Out of Sample data would help us decide if this is true

Illustration of “Shrinkage” 0% -20% - 40% Orange = S&P 500 Blue = Rydex Titan 500 Fund Shrinkage looks to be about 7-8% a year - 60%

Drawdown low compared with return No need to wait for a Bull Market Things That I Like Relatively steady return (not dependent on large returns in a few situations) Drawdown low compared with return No need to wait for a Bull Market Simple and mechanical -- no judgment No stock picking Easy to start gradually Sharp edges: Example: what if the MTI goes only to 0.48 and then makes a sharp turn? Lots of data points, but relatively few cycles (about as many as the Elliot Wave followers have for major cycles) Parameters optimized: Maybe it works in this period because we adjusted the parameters to this period Out of Sample data would help us decide if this is true

Strategy for Long Run Success with MTI / Rydex Method Start small Build confidence Use Nasdaq 200% funds sparingly Read Trading In The Zone Research / stay aware of improvements