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Market Trends for September 2017

Hurricanes, The Fed & North Korea created plenty of headwind in September

With 8 out of 9 monthly observations at or below 45, the Trend Barometer has been a perfect gage of the difficult environment that trend following strategies have faced this year. And September was no exception.

This is one of those rare prolonged periods where the men are sorted from the boys when it comes to holding on to this kind of strategy.

But what is really interesting when you take a moment and look a little bit deeper, the apparent calm expressed by the Index of Fear (VIX) only tells part of the story. In fact the "fear of fear" as you further out the curve is increasing, which may explain why we see continued new inflow into both short-term and longer-term trend following strategies.

A positive sign in my opinion, where smart investors make sure to be well positioned with non-correlated strategies BEFORE the need it, instead of "after the event" which has normally been the case.

As Ray Dalio explains in his new book "Principles" that came out in September...if you combine a number of un-correlated strategies you are able to reduce the overall portfolio risk by as much as 80% WITHOUT giving up any of the upside!

This is how he has built his "legacy portfolio" based on sound principles, which are not new by any stretch of the imagination, but are now becoming accepted and acted upon by a much wider group of institutional and high net worth investors.

Hopefully this is a TREND that will continue to build strength!

Next, let’s look at where the trend Barometer finished the month;
2017-09_TB with Heading

The overall Trend Barometer dropped as quickly as it rose to end the month at a reading of 36...below the break-even point of 45. I suspect that most CTAs will finish in the RED...and early indications for both the Trend Following Index and Short-Term Index suggests this as well.

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 15 to 12 during the month. Strongest trends were recorded in energy markets, such as GasOil, HeatingOil and Brent and in a couple of the Short-Term interest rates markets like Short Sterling and EuroDollar. Base metals was represented by Lead and Zinc and Precious metals by Palladium and Platinum. As usual we saw a few equity markets on the list of markets in a trending state.

2017-09_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 2 to 1 out of 10 sectors, which perfectly illustrates the lack of overall trending behavior.

With GasOil, HeatingOil and Brent on the list of trending markets...it comes as no surprise that the Energy sector was the only sector showing some sign of life.

For those who are relatively new to trend following, it is important to note that historically, Q4 has tended to be the strongest quarter of the year.

Will this be the case in 2017 as well?

The truth is, I don't know...but what I do know is that we often see the strongest trends following the most difficult periods. Remember back in 2013, when many commentators had pronounced the Death of Trend Following after a excruciatingly difficult summer period...after which trend followers came roaring back the following year!

All I'm saying, as long as you are invested with a manager that is managing this difficult spell well...then you should be in good hands for when the trends re-emerge.

2017-09_Sectors with Heading

The last chart shows the evolution in the Trend Barometer since January 1990.

The first thing you may notice is that the Trend Barometer spends most of the time below 45...but that clearly does not mean that trend followers can't make money, as they have done during the last 27 years.

But what I noticed, is that the period since late 2014 till now looks very similar to the period from mid 2012 to early 2014.

Both period were difficult in terms of performance for this strategy and both periods were similar when it comes to lack of monthly TB observations above 55 or so. No dark blue points are to be found during these 2 time periods.

But note what happened to the TB after the first period, suddenly we got a very strong cluster of dark blue observations, which of course showed up in the performance as one of the strongest overall periods for the strategy in the past couple of decades.

If history is any guide, then one could argue that we are getting close to seeing this unusually weak period for the TB coming to and end, and those investors who have withstood the temptation of putting everything in equities...will be the ones collecting the chips as investors head for the Exit!

TB Since 1990

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.

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.

4 Comments

  1. William Wright on 10/01/2017 at 4:19 PM

    I think I’m proving to be a man not a boy with TF. I can only hope, as you’ve suggested, that the worst might be over (for now) and we’ll see some significant growth in our portfolios in the new (4th) quarter and subsequent quarters (and hopefully years).
    This has been a rough ride; particularly watching the equities set new records almost weekly, if not daily.
    Wm Wright

    • Niels Kaastrup-Larsen on 12/01/2017 at 11:29 AM

      Well…as of the end of November…some trend followers have made back most if not all of the drawdown…this is classic trend following in my opinion. But great that you stayed with it!

  2. Anders Mølgaard on 10/06/2017 at 12:39 AM

    Hi Niels,

    Great page with lots of very useful information and knowledge. Thanks a lot for sharing…

    What is your opinion on using ETFs for market exposure in a trend following strategy?

    Regards
    Anders

    • Niels Kaastrup-Larsen on 12/01/2017 at 11:30 AM

      Hi Anders,
      The instrument is not so important…so yes you can certainly use ETF’s for implementing Trend Following…just make sure they are liquid and that you have good and reliable data.

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