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Market Trends for February 2018

If Trend Following was an Olympic would this


February was the month where many markets caught the flu and inflicted pain on many investors.

Personally, I caught this nasty bug as well...and right in the middle of the Olympic Games in PyeongChang. But that was in someways lucky, as I had a free pass to watch all the television I wanted...including the Olympic Games.

It's fascinating to see people at their peak, do incredible things...and make it look so easy.

Watching all this sport, made me think...

what if Trend Following was any Olympic Sport...which one would it be?

What do YOU think?

It took me a while to come up with my favorite...

It had to be a sport that would visualize the courage it takes to invest in a strategy that thrives from uncertainty and volatility.

Where you don't try to predict but rather accept "knowing what you don't know" and allow your positions to flow with where the markets take you.

Where the twist and turns in performance from time to time can hit you with g-force acceleration or deceleration (as experienced in February).

...but I think I found the perfect sport to do just that.

Watch this short video and you will see what I came up with 🙂

Now, let’s look at where the trend Barometer finished the month;
2018-02_TB with Heading

The Trend Barometer dropped like a stone from 60 to 30, bounced a bit and dropped right back to 30, which as a loyal reader of my blog, you know is a pretty weak reading...suggesting that trouble was on the horizon for trend based stategies.

Large losses accumulate when there have been strong trends which usually lead to accumulated profits over time. Price that diverge from longer trends will usually have more risk potential which is the basis for momentum crashes. Managers were also hurt by the increased correlation across many assets.

February was a strong test for system design, portfolio construction, and risk management. Unfortunately, some managers did not pass the test and even good managers could not sidestep this volatility shock.

The next chart below shows a snapshot of a 44-market portfolio with markets listed in “groups” of market sectors;

The number of markets recorded in a trending state more than halved from 23 to 11 during the month. With trend changes occuring in some markets like the Grain Complex, which finished the month with some of the strongest up-trend readings. In fact Commodity markets had most of (the few) trends at the end of the month.

There were a handful of trends that persisted during the month, mainly in the short-term interest rate markets and US bond markets.

2018-02_Markets with Heading

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state halved from 4 to 2 out of 10 sectors... which is a typical number during the months of very few persistent trends, which we have seen a lot of in the past few years.

As mentioned last month...Stocks did not finish January in a trending clearly the Trend Barometer picked up the loss of momentum in this sector, before the "crash" in February. Interesting.

As mentioned above the markets that were in some kind of trend pretty much all belonged to the two sectors left standing...namely Grains (Up-Trending) and Short-Term Interest Rates (Down-Trending) no surprise there.

But noticed how pretty much all the other sectors, with the exception of Bonds and Meats, were pretty much close to "0"...I think that really shows how few trending opportunities we had in February due to the reversals and transitions many markets went through.

And when there is a major financial shock, correlations move to one and there is no hiding from risks.

BUT remember, volatility and risk are not the same thing!

2018-02_Sectors with Heading

The last chart shows the daily trend barometer chart for the past 3 years.

As you can see the TB nosedived in February as quickly as oppinion polls for many politicians and despite attempting a bounce mid month...this failed and the TB finished the month pretty close the low.

And when this happens...trend followers and CTAs in general suffer.

Perhaps the key takeaway is that the calm markets of 2017 will not be the norm for 2018. A volatility environment of around 20% for the VIX is higher than the long-term average of 15% since its inception and tells us that we should be prepared for greater daily and monthly moves. Not to be alarmed by this would only be a return to more normal conditions.

There is no positive spin with the performance numbers of CTAs and trend followers this month. In a portfolio of stocks, bonds and CTAs... yes the less risky assets like bonds fell less than the more risky assets, although year to date numbers show that bonds have not been a safe haven and are in fact down more than all of the CTA indices.

Food for thought!

2018-02_TB Evolution since 2015


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.

P.S. if you want to follow the Trend Barometer on a daily basis, please click here and if you want to see the list of Market Symbols explanations, please click here.

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