What we tested and chose not to endorse

Closed-system backtest flaw (the critical one)

The book's own examples assume periodic cash infusions from the investor's salary to replenish the bond sleeve. A faithful closed-system backtest, no new money, just rebalancing, is NOT what the book describes. Once the bond sleeve is depleted after a severe drawdown, there is nothing left to buy the dip with, and the strategy degenerates into leveraged buy-and-hold. Our backtests reflect that degenerate regime faithfully.

The signal line never resets downward

The target value for the stock sleeve compounds forward at 3/6/9% per quarter regardless of what the market has actually done. After a crash, the target sits far above reality, the rebalancer goes all-in on stocks, and, if there is no fresh cash, the strategy is now 100% stocks at the worst possible time.

The 30 Down rule is a capitulation trigger in disguise

By design, the 30 Down rule dumps the entire bond sleeve into stocks once the ETF is 30%+ below its all-time high. That can be a fine rule if you have dry powder coming in next month. In a closed system it is a one-way valve: all future upside is levered, all future downside is fully exposed.

Leveraged variants (6Sig/9Sig) are path-dependent traps

MVV is 2x daily mid-cap. TQQQ is 3x daily Nasdaq. Both suffer volatility decay on top of the mechanical flaws above. Our 9Sig backtest shows -94.3% max drawdown over 38 years. An investor who held through it would have needed to watch $100,000 turn into $5,700 and then wait years to break even, a level of drawdown that is psychologically and practically unsurvivable.

It does not beat simple buy-and-hold on risk-adjusted terms

Our Classic 60/40 benchmark (SPY/AGG) produces 8.7% CAGR with a -34.7% max drawdown and 0.78 Sharpe over its full 46-year history. A plain S&P 500 buy-and-hold produces 8.6% CAGR with a -56.8% max drawdown and 0.47 Sharpe over its 36-year history. All three Kelly variants have a LOWER Sharpe than 60/40, and 6Sig / 9Sig have drawdowns that dwarf even SPY's 2008 experience. For 3Sig specifically: similar CAGR to buy-and-hold but with a longer peak-to-recovery path and an added layer of mechanical complexity. There is no version of the Kelly family where the risk-adjusted outcome is worth the complexity, the tax drag, or the behavioural hazard.

Managed futures as defense is mistimed by construction

A momentum gate flips defensive only after the trend has already turned, typically one to four months late. Managed futures pay at the onset of a trend, not in its mature or reversing phase, so the gate holds you in them through exactly the whipsaws that hurt them most. 2022 is the tell: it was a banner year for trend-following, yet the reversed strategy earned +0.2% across its defensive months versus +2.4% for bonds, because the gate missed the front-loaded January-to-April gains and held through the second-half reversals.

Bonds simply won the risk-off months

Isolating only the months the gate was defensive, a best-of Treasuries/T-bills leg returned +6.1% per year at 5% volatility. The managed-futures sleeve returned +4.2% per year at 13.5% volatility. Higher return at under 40% of the risk: when the strategy actually needs its defensive leg, bonds delivered more for less.

The crisis-alpha reputation does not hold in the crises that matter

In 2008 the managed-futures leg returned +7.4%, but Treasuries returned +10.7% and gold +16.7%. Managed futures did win the slow trending bears (the 1987 crash, the 2000-2002 dot-com grind), and lost 2008, 2013-14 and 2015-16. As a general-purpose defensive leg it is the wrong tool.

Adding the credit sensor was marginally negative

In a leave-one-out test on the S&P 500 from 2008 to 2026, adding the high-yield credit z-score on top of the trend and volatility gates moved CAGR by -0.54 percentage points, left the Sharpe essentially unchanged, made the worst drawdown 0.7 points deeper, and added 19% turnover. On net it subtracted a little while adding trades.

Credit strength is already inside price trend

By the time high-yield spreads widen enough to flip a credit gate, the equity trend gate has usually already moved. The information the credit signal carries is largely priced into the thing you are already watching, so stacking it on adds trades without adding foresight.

The simpler rule we ship already wins

The full three-sensor rule managed 8.8% CAGR at a 0.39 Calmar ratio. Our plain 200-day trend rule did 9.4% at a 0.44 Calmar and a -21.5% drawdown, using roughly a quarter of the trades. More sensors read as more sophisticated; here they were strictly worse.

Tripling daily returns is not what a 3x ETF does

A real 3x ETF borrows to lever up, and that borrowing costs money every day: the financing rate plus a spread. Backtests that just multiply an index's daily return by three skip that cost entirely. Over decades it compounds into 5 to 7 percentage points of CAGR per year of pure illusion. This is the same trap as the leveraged Kelly variants above.

The drawdown is understated too

The marketed version reports a -26% max drawdown. With realistic leverage costs and daily resolution, the same rules take -38.8% through the dot-com bust. Cheaper-than-real leverage flatters the drawdown as well as the return.

Volatility targeting is real, the headline is not

To be fair to the idea, volatility targeting genuinely helps: it contained the 2022 bond crash far better than a static leveraged blend, and the honest 13% version still beats a plain S&P buy-and-hold on return, Sharpe and drawdown. The strategy is not junk. The 20% is.

Gold crashed in the crisis it was supposed to hedge

In the 2008 liquidity panic gold fell hard as investors sold everything they could. A strategy that fled to gold took a -38.9% drawdown through the financial crisis versus -22.3% for the same strategy holding T-bills. A defensive leg whose job is to cushion a crash cannot itself crash in the crash.

Almost no return for the extra risk

Over 2007 to 2026 on the live signal, the gold leg added 0.3 percentage points of CAGR (13.1% versus 12.8%), while lowering the Sharpe (0.62 versus 0.64) and roughly doubling turnover. The one number that moved in gold's favor is inside the margin of noise; everything that matters moved against it.

The impressive backtest is a gold-regime artifact

A naive 25-year isolation of a gold defensive leg looks spectacular, but almost all of that edge is the 2001-2007 gold bull market, a period our credit-dependent composite cannot even trade. Strip the window back to what the real signal can act on and the edge disappears. T-bills do not crash, and that turns out to be the whole point.

The +4,000% is a start-date artifact

TQQQ launched in 2010 and this backtest starts with it, at the exact bottom of the 2008-09 crash. It rode the entire 2010-2021 Nasdaq bull and has never been shown through the 2000-2002 dot-com collapse, when a daily-reset 3x Nasdaq fund would have lost essentially everything. A leveraged backtest that begins after the last crash is not evidence that it survives the next one.

The worst drawdown is recent, not ancient

You do not need the dot-com era to see the risk. On the flattering 2010-start window, our reconstruction still draws down about 65%, and it happened in 2022: the trend rules were late leaving TQQQ off the January-2022 top, and the defensive leg made it worse rather than better.

The ZROZ safe leg is a second bet, not a hedge

When the Nasdaq breaks trend, the strategy parks in ZROZ, which is 25+ year zero-coupon Treasuries, one of the most rate-sensitive assets in existence. In 2022 that leg was falling at the same time as the Nasdaq, so the defensive position deepened the loss instead of cushioning it. A leg whose job is to protect you cannot itself crash in the same event; a T-bill would have done the job it was there to do.

The clean version of the idea still drops 93%

Strip the twenty tuned rules down to the honest core, hold 3x Nasdaq while the index is above its 200-day average and step aside otherwise, and run it through the dot-com bust: a 93% max drawdown. The stack of extra rules is not robustness, it is curve-fitting to the one history the chart happens to show. The underlying idea has a catastrophic tail either way.