Trend Followers Hold On to BREXIT Gains
We have seen it plenty of times in the past, where after a huge gain in trend following performance, markets reverse and a good portion of the gains are given back.
Whilst there is nothing unusual or concerning about this type of situation, it is often a reason why many investors find it hard to fully embrace trend following as part of their portfolio. They clearly prefer the steady stream of gains…until the big washout occur, that hurts so much that they ignore these unrealized losses and hope for a recovery.
So after the BIG gains in June, following BREXIT, it was refreshing to see CTAs and in particular trend followers hold on to the gains recorded in June and in some cases, add a decent return for the month of July.
The good news for investors from July's performance is, that usually when more time passes after a big monthly performance, trend following systems, in general, will be better positioned to deal with the next reversal in the markets when it happens.
What I mean by this is, that trend following strategies find it much harder to deal with a “V-shaped” reversal as the models needs time to pass in order for “stops” or signals to reverse a position catches up. This is why we often see trend following systems having a much harder time locking in profits from short trades compared to long trades, as typical a market bottom is much quicker to form than a market top. Just think about the Energy markets earlier this year as an example, where the low was pretty swift.
OK…now back to the Trend Barometer which on a closing basis ended the month of July well above the Break-Even point of 45.
Firstly, let’s look at where the trend Barometer finished the month;
What was quite rare about the Trend Barometer in July, was that it spent all of the month above its break-even level, gyrating between 50 and 56 for most of the month.
The next chart below shows a snapshot of a 44-market portfolio with markets listed in “groups” of market sectors;
Bonds and Interest Rates held on to their Up-Trends albeit at a lower level than at the end of June. Some Equity markets confirmed a new Up-Trend, whilst in Currencies the Yen and Pound was joined by Aussie$ and Canadian$ as they started trending. Energies seem to have resumed their Down-Trend, whilst Metals ended the month in general Up-Trends. Strongest Trend Barometer reading was recorded for Lean Hogs (Down-Trend) along with a few other Commodity markets.
In the chart below, I have grouped the markets into 10 sectors. 3 out of 10 Sectors finished the month in a trending state (Bonds, Meats and Metals).
It's been a while since we have had 3 sectors trending at the same time, which confirms the overall good conditions for trend followers in July.
The last chart shows the evolution in the Trend Barometer since January 2015.
The month of July did present some challenges for Trend Followers, especially the sell-off in Bonds and the Yen mid-month,
but this is of course where portfolio diversification can play a big part as well as diversification between managers. Even though Trend Followers tend to have a relatively high correlation overall, now-a-days they are fairly different when you dig into the details, which is why, 1 Trend Follower is not enough to give investors adequate exposure to this strategy.
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.