Hello again, friends and fellow traders. Well, we knew the market was vulnerable. The bears capitalized on that vulnerability today. Thing is, as ugly as things might get for stocks in the near future, we're still thinking the bull market is intact. Any weakness from here is just a much-needed reset, which would do us the favor of reeling in the market's crazy valuations. It's also the right time of year for weakness, so we're really not sweating it. We're just trying to identify the best way to make a few bucks off of any pullback to offset the lumps our long-term holdings may be taking. On that note, I'll just mention John Monroe over at the Elite Opportunity saw this move coming several days ago, and traded accordingly. He specifically said back on May 11th: "I still, however, am convinced these markets want to go lower, regardless of whether or not they start doing it this week. With that, it's more of a timing issue right now. Meaning, you can either pick up some index ETF put positions a few months out on QQQ, SPY and/or IWM, and let the markets work themselves out, or you could straight enter into SQQQ, TZA and/or SPXU and use roughly 4,880 on the NASDAQ Composite as your backstop." The NASDAQ Composite was at 4799 then. Now it's at 4712, down 2% since John made the call even with today's mid-day rebound effort. The NASDAQ is also in a heck of a lot more trouble than it was in just a little over a week ago. By that, I just mean there's not apt to be an easy, quick recovery for the market now that the bears have dealt another blow. The NASDAQ Composite hit a new multi-week low today, which is going to spook a bunch of people. You can also see the NASDAQ is not only back under all of its key moving average lines today, but some of those lines have recently crossed one another in a bearish direction. You'll also notice a strong upward move from the VXN. It didn't stay at that high, but it got there on an intraday basis. Small steps. In any case, John clearly nailed it.... with almost freakishly-perfect timing. The 11th was the day following a strong bullish move that looked like it was kick-starting a rally. Monroe knew better though, recognizing the next day's weakness was the shape of things to come. His suggested trades on bearish leveraged funds SQQQ and TZA are up 5% and 11%, respectively, but as of today that looks like just the beginning. I know there was a modest late-day pushback on Thursday, but the bearish damage is done - the bears tipped their hand. You can't unring a bell. Unfortunately, it's a little late to be joining that party. It's not completely too late to join it, but the risk/reward profile changes the most at the very beginning of a trade. Elite Opportunity members who got in last week have a wider profit cushion to play with, which means they can afford to be more aggressive with their trades than newcomers can. Moral of the story? The best way to make sure you get into new trends while the proverbial gettin' is good is by becoming an EO member. The savvy timing of John's suggestion is actually pretty typical of him. Here's how to get it, or just cut and paste this link: https://www.smallcapnetwork.com/pages/SCNEO/v1/ Anyway, here's a look at the S&P 500.... our weapon of choice. It's on this chart we can see how the VIX temporarily pushed past a huge layer of technical resistance in conjunction with the S&P 500's move to a lower low and lowest close we've seen in weeks. The VIX didn't hold above the ceiling at 16.9, but it's clearly chipping away at it. Before today there was still some lingering hope the market might sidestep a big setback. After today, there's not as much. We may even see another modest bullish effort. Those bounce efforts are getting progressively weaker though, and there's a strong ceiling forming around 2060. One more bad day could do the trick. In any case, as we mentioned in yesterday's newsletter today we're going to continue on with our discussion of why the investing/trading newsletter business is rife with subpar and even money-losing strategies and portfolios. Today's focal point is one that's particularly near and dear to my heart.... algorithmic trading systems that never seem to work in the real world as well as they did when they were being developed and back-tested. There Is No Secret Formula If you're involved in the market enough to be reading the newsletter you're reading right now, I'm sure you're involved enough to have at least seen a few promotions of a can't-miss, surefire, double-secret trading system proven to make tons of money in good times and in bad.... some sort of refined algorithm that's taken years to develop. It's so special, in fact, its developers can't even tell you what the formula is. They can only tell you that it works, and back it up with a hypothetical trading history to prove it. My response to that idea? Hogwash. Without boring you with all the gory details, after I was a broker I became an analyst with a boutique firm that was far more into trading than investing. Out of necessity I quickly learned the ins and outs of a platform called TradeStation, which is arguably THE best option for trading-system developers. How's that? It's got backtesting software that can not only custom-build buy and sell signals using anything on a chart that can be quantified -- and I mean anything -- It can also test such a system and even find the optimal parameters for using it. More recently it's offered a tool called Portfolio Maestro, which not only back-tests and optimizes a trading system for one security or index, but can test and optimize a system for an entire group of stocks. It's really quite amazing. It's just not all that useful. Don't get me wrong. I love TradeStation (some of the charts we use were made with TradeStation), and I still tinker with trading systems as an idea-generator. I also know that removing the discretionary part of trading has a big upside. As a user of TradeStation and other platforms like it though (including a tool called TradeNavigator, eSignal, and a couple of others) I can say there's no such thing as a turnkey trading system than can be trusted to yield positive results in perpetuity. I know it, because if there was I would have found it by now. So how come some of these guys seem to have built systems that have done so well in the past? A psychological tendency called chart-fitting is one reason. The biggest flaw I see in those secret-sauce systems, however, is what I call white swans. If you're not familiar with the term black swan as it pertains to the market, it's a reference to the very unusual and completely unpredictable events that can absolutely destroy a portfolio. The subprime meltdown of 2008 was a black swan. We'd never seen anything quite like it before, and probably never will again. In a similar vein, a white swan is an equally unforeseeable pleasant event that makes one trade using a trading system a very, very profitable one, while all the other trades that system suggested aren't collectively impressive. It's a problem, because you can't count on repeats of white swans. The images below illustrate what I mean. They tell the details of a real simple trading system I set up for Ford (F) earlier today. The first image is a broad assessment of the system's performance going back for the past 20 years. I hypothetically bought 100 F shares when I got a buy signal, and sold those 100 shares when I got a sell signal. I got a total of 14 trades during that time, 57% of which were profitable. Though my losing trades cost me $574, my winning trades netted me $2377 in gains for a total net profit of $1803 just using this very simple strategy. So far so good, right? Here's the problem. Take a look at the trade-by-trade list below. One trade scored me a 117% profit. Sure, the system still "found it", which is what it was supposed to do. It's very unlikely we'd see that same buy signal yield the same results again, however. The system was optimized to find that one very unusual white swan event between 2008 and 2009. The rest of the time.... meh. With that one great trade, the average result of each trade is a healthy 17% gain. Without that one big winner, the average gain is closer to 8%. Factoring in commissions and slippage, this system would have done well to break even. Yet, the system would have still tied up capital during its holding periods, which means opportunity cost for you (meaning you could have done better doing something else with those funds). Fine, but what does any of this have to do with you? If you've been a student of the market for any length of time at all, I'd be willing to bet at some point you've been offered access to a great portfolio with a great track record that was made great by such hypothetical results rather than actual stock-picking. Heck, some surprisingly credible newsletters are touting results a system has achieved in the hypothetical past, rather than the real past. You may want to start reading all that fine print. Fact is, those big gains likely won't be repeated just because algorithms can't distinguish the difference between white swans and everything else. In the bigger picture, this all ties into something we said in yesterday's newsletter... "My point is, there are only a few truly great financial newsletters out there. All of them are run by real people who think multi-dimensionally. By that I just mean people who understand there is no secret-sauce trading system. Sometimes the market is bearish. Sometimes things aren't 'quite right.' Sometimes things that would normally work won't work at that time because the situation is wrong. Sometimes investors have to be traders, and sometimes traders have to be investors. Sometimes you have to be proactive, and sometimes you have to be reactive. The hard part is knowing when all those "sometimes" are. It can't be programmed into a computer though. That's why there are so few really great newsletters out there." To answer the question you may or may not be asking, yes, we still use TradeStation and eSignal, and from time to time use them to generate buy and sell ideas. Most of the time we reject the signals though, though, recognizing the situation's not right for a repeat performance of what happened in the past. We like to do the scans anyway, just because every now we find a diamond in the rough that we wouldn't have found otherwise. They're the exception rather than the norm though. OK, we'll wrap up today's rant there, and just close by cautioning you to look closely at the results a lot of newsletters say they're producing. A surprising amount of time those are just numbers somebody thinks they would have achieved by using their latest, newest trading algorithm. I've never seen it work out as well as hyped though. Again, the truly great newsletters come from people who understand how the market works in the real world, and have demonstrated that with real results. Check back in tomorrow and we'll finish this saga up, and take an updated look at the broad market's brewing breakdown.