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Market Trends for January 2017

2017 - Off to a weak start for Short Term Managers...

The clear winners within the CTA space in 2016 were Short Term managers, who were able to navigate sudden expansion in volatility on a few occasions much better than their longer-term siblings.

However, 2017 has hardly begun before a lot of this out-performance has been eroded. In fact, when looking at the SG STTI index since 2008, I could not find a single month with a negative return like January 2017.

Clearly the collapse in volatility with the VIX trading at almost historic lows will have been a part of the explanation of this "unusual" tough period for this strategy...but what investors ought to ask themselves is...

"does it make sense that with all the uncertainty that we have in the world right now...that risk is trading at these low levels?"

My answer is pretty clear: NO IT DOES NOT!

And with a steep drop in the Trend Barometer during the month of January, you would expect that trend followers would have suffered even more than the Short Term strategies...but initial results show that this is not the case.

Firstly, let’s look at where the trend Barometer finished the month;
2017-01-31_TB with Heading

At the time the whistle blew for the first month of 2017, the trend barometer closed well below the break-even point.

However, most of the month it had been gyrating around a level of 45, a neutral reading, which probably explains why medium to long-term trend followers did OK, in a difficult month.

Perhaps the good news here is that the start of this year, is very different to what saw in 2016 where the mini-crash during the first 6 weeks, elevated expectations towards a great year for trend following strategies, but which later turned out to fall short of these expectations.

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 decreased from 18 to just 9 during the month. Of those remaining in a trending state, we saw all 4 Base Metals take up a slot, accompanied by a couple of stock markets, the Canadian Dollar, Cotton and Cocoa...which was in the strongest trending state of the 9

2017-01-31_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 was chopped in half from 2 out of 1.

When you see just one out of 10 sectors trending, you are tempted to can't get much worse than this...and I wonder if this could be one of those periods where you simply have to buy in to the current drawdown.

In other words, this is a time to embrace the high uncertainty through specific choices but not specific predictions.

2017-01-31_Sectors with Heading

The last chart shows the evolution in the Trend Barometer since January 2015.

As mentioned above, the steep drop in the Trend Barometer since late December is pretty evident.

When you look at the chart you are tempted to say that it must be impossible for trend followers to make money when the Trend Barometer does not have long periods of readings above 50. But I just want to remind you, that trend following is not a strategy that makes a little bit of money each month. On the contrary.

Usually 2 to 3 good months can easily make the whole years performance, so even thru the challenging period we have witnessed since can still find good trend followers who have done very just need to look a bit harder!

And interestingly enough, you should not "trend follower" (buying high and selling low) when it comes to investing with this strategy. In this case, you need to be a "counter-trend" investor.

2017-01_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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