Trend Barometer Picks Low to Perfection
September picked up the downward spiral of the Trend Barometer that had started in August and on September 9th the Trend Barometer hit the lowest point recorded in the last couple of years with a reading of just 11. (remember anything below 45 indicates difficult times for trend followers).
It turned out that the Trend Barometer managed to pick the low point to perfection, and performance of many trend followers started to stabilize in the days following this low point, which not surprisingly coincided with the FED and ECB officials being active on the airwaves.
With the Trend Barometer hitting a low early in the month, at least there was hope that a decent recovery could emerge. But despite a decent attempt to get back to break-even, market conditions made it difficult to erase the damage caused during the first half of the month.
Firstly, let’s look at where the trend Barometer finished the month;
At end of play on Friday, September 30th, some improvement had emerge, especially in the commodity part of a fully diversified portfolio.
The next chart below shows a snapshot of a 44-market portfolio with markets listed in “groups” of market sectors;
The number of markets in a trending state, increased from 7 at the end of August to 12 at the end of September. Sugar continued it's up-trend and joined the grains and meat markets which have provided some level of consistency in their trends recently. Lead and Zinc ended with an even stronger trend reading compared to August and Nasdaq was joined by Bunds and Bobl in the financial sector. So despite many investors “fear” of being long fixed income markets, the disciplined approach is still to have some kind of long exposure, until such time that market price action supports a turn in trend.
In the chart below, I have grouped the markets into 10 sectors. Just 2 out of 10 Sectors finished the month in a trending state (Grains).
With a continuation of the very narrow set of opportunities for Trend Followers, Risk Management and nimble Exit's is key to avoiding large losses during this period. Return Dispersion between seemingly similar managers may well rise as a consequence of this and investors need to carefully evaluate the performance of their chosen managers. It is always during the difficult times that the truly skilled managers stand out.
As Warren Buffett once said:
Only When The Tide Goes Out Do You Discover Who’s Been Swimming Naked
The last chart shows the evolution in the Trend Barometer since January 2015.
As mentioned above, the Trend Barometer bottomed on September 9th and started its recovery towards month-end,
and although trend following is not predicated on making any kind of forecast, it should be noted, as we head in to the final quarter of 2016 with a US election and further FED meetings that may finally deliver the rise in rates that the market have been led to believe is “just around the corner“…Q4 has historically proven to be the strongest when it comes to Trend Following performance.
All I can say it, that if CTA performance for 2016 has to finish close to its long-term average, Q4 has to come in strong, which may indicate that surprises, uncertainty and volatility will persist for the rest of the year.
And a well diversified portfolio is the best way of preparing for such an environment.
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.