Drought in the Dakotas sums up Drought in Trends in 1st Half 2017
June was off to a good start and it all looked fine, despite another surprise election in the UK…but all this changed in the last few days of the month.
So what happened?
Well, for many Diversified Trend Followers we need to look to the major drought in the Dakotas which has caused spring wheat crop conditions to decline sharply in the past four weeks.
Wheat has rallied more than $110 since the June 1 Low…close to 25%…
…and sharp trend reversals like this, is what medium to long term trend followers will have found difficult to handle.
And of course, Wheat was not the only grain market that had sudden trend reversals…in fact the whole grain complex rallied during the month of June.
And if this wasn't enough…
Stock markets, which have been in a long term up-trend, saw some weakness during the second half of the month, which added to the losses of trend followers, especially during the last week of the month.
So as the 1st half of 2017 came to a close, it is clear that the trend environment has been challenging and where risk management and agile profit protection mechanisms has been the key to how well managers have been able to navigate this environment.
Firstly, let’s look at where the trend Barometer finished the month;
The overall Trend Barometer finished significantly lower from where it started…dropping to a reading of 30…which supports the early indications of a though month in terms of performance for all trend following indices as well as short-term managers.
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. No one single market stood out in terms of trend strength, but there seemed to have been a slight concentration of trends in the currency sector, with the dollar under pressure against a number of currencies.
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 cut to 2 out of 10 sectors, confirming the drought in trends at the moment.
Currencies and Meats were the only sectors showing some level of trending behavior…but both at very low levels.
In many respect the 1st half of 2017 resembled the difficult conditions for trend followers that we have seen in many of the past 8 years. Few and short-lived trends combined with sharp reversals.
However, there are some bright spots when it comes to managers that have been able to deliver solid returns despite it being a bit of an up-hill battle…with return dispersion increasing, investors are required to look outside the multi-billion managers in there search managers that can add value to their portfolio.
The last chart shows the evolution in the Trend Barometer since January 2015.
The Trend Barometer “nose-dived” in the last couple of days of June, to hit a level of just 30 at the 2017 half-time point
But let's not forget the bigger picture.
As I was reminded in my latest interview with CalSTRS…this $200bn pension plan have decided to allocate 9% of its portfolio to Risk Mitigation Strategies…and guess what…after extensive and careful analysis using 20-year time windows in their measure of effectiveness…they concluded that Trend Following should make up 40% of these Risk Mitigation Strategies.
So despite a tough start to 2017 for most (but not all) trend followers…let us never lose sight of the important role they play in an overall portfolio.
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.