1. 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

2. For a copy of these slides (minus MTI chart), email request to:
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

3. 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.

4. 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.

5. Intermediate Tops and Bottoms
Low Top

6. 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

7. 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

8. 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

9. 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

10. 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

11. Results with Titan / Tempest
587 Trading Days 7/18/2000 to 11/20/2002
Rate of Return: Daily Monthly Annual
0.381% % %
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 %
Average PM Gain %
Average PM Loss %
New High Days 20%
Short Days 60%
NOT Hal’s favorite funds -- he likes the Nasdaq

12. 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

13. 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%

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

16. Results with Ultra Bull / Ultra Bear
586 Trading Days 7/17/2000 to 11/20/2002
Rate of Return: Daily Monthly Annual
0.311% % %
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 %
Average PM Gain %
Average PM Loss %
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

18. Results with Velocity / Venture
587 Trading Days 7/18/2000 to 11/20/2002
Rate of Return: Daily Monthly Annual
0.591% % %
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 %
Average PM Gain %
Average PM Loss %
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!

19. Big rollercoaster!

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

23. 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

26. 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

27. 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%

28. 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

29. 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