Trend-Less August Thanks to Yellen
The month of August kept its recent reputation of trend-less markets. In fact, August has in 4 of the last 5 years proven to be rather lack-luster when it comes to trends and trend following performance. So no surprise there!
Neither did Federal Reserve Chair Janet Yellen drop any surprises in her August speech and so now we wait for the September meeting with anticipation...but let's not forget that despite the repeated intentions to raise rates, officials have skipped a hike at all five meetings this year.
Fortunately, rule based trading systems, such as trend following, are not aware of these hyped-up events and simply take one day at a time, assessing the trend strength, the volatility and a few other key factors when determining how the positioning should unfold.
Despite the fact that trends seem to have fizzled out in the last month of the Summer, the 3 warmest months of the year, certainly provided excitement and good performance for many trend following managers, and let's not forget, the best calendar quarter is just around the corner, as trend followers tend to produce the best performance in Q4 on average.
So there are plenty of things to look forward to as autumn sets in.
OK...now back to the Trend Barometer which on a closing basis ended the month of August well below the Break-Even point of 45.
Firstly, let’s look at where the trend Barometer finished the month;
When the final whistle sounded for the month of August, it was very hard to find a market that showed some kind of trending behavior.
The next chart below shows a snapshot of a 44-market portfolio with markets listed in “groups” of market sectors;
In fact, only 7 out of 44 markets were in a trending state. No market was in a Strong Up-Trend and only 2 (Corn & Wheat) were in a Strong Down-Trend. Base Metals such as Lead & Zinc showed moderate signs of Up-Trending behavior accompanied by Nasdaq, whilst SoyMeal and Live Cattle trended moderately lower - which left 37 markets in a Neutral state.
In the chart below, I have grouped the markets into 10 sectors. Just 1 out of 10 Sectors finished the month in a trending state (Grains).
When face with such a narrow set of opportunity, it is no surprise that trend following strategies will find themselves in negative territory. The question will instead focus on, how well each manager weas able to limit the losses during such a trend-less period.
The last chart shows the evolution in the Trend Barometer since January 2015.
It was pretty much a straight line down in August, when it comes to the Trend Barometer,
and whether you were short or long-term in your holding period, I think that we will find very few examples of positive performance this month. So even though many critics will say that trend following strategies are un-predictable...I would respectfully argue that with a tool like the Trend Barometer, trend following performance can be very predictable!
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
I hope you found the information useful as part of your own evaluation of the trend following part of your investment portfolio. I will continue to do my best to keep you up-to-date with regards to the environment for diversified trend following strategies and would love to discuss any of this information with you. Just reach out to me.