Trends in Financial Markets Help CTAs to Profit
If you only followed the Trend Barometer at the end of each month…you would know that the last 4 months have been anything but exciting, if you are involved in trend following or the CTA industry as a whole.
Readings of 45, 45, 30 & 30 in the past 4 months clearly demonstrate that not only has it been hard to get above break-even (45) but when it comes to trends…June and July have been as bad as the Danish summer I have witnessed the last few weeks.
And when it rains, it pours …
…in fact we have not had 1 single month so far in 2017 where the Trend Barometer has closed above its break even level.
- The financial markets seem to reflect calm and tranquility, with the VIX index making a 30-year low only a few days ago…
- 10 consecutive daily records for Nasdaq in July
- 27 record highs for the S&P 500 so far this year
- The S&P 500 has gone 264 days without a pullback of 3% or more, making it the fourth-longest stretch since 1928, according to Bespoke Investment Group
And all this at a time where most people would agree that the political and economic risks are higher than we have seen in many years!
Before we move on…let me share a quote from my conversation with the three founders of AHL, Mike Adam, David Harding and Marty Lueck that took place at the famous Abbey Road Studios in London in early July.
Marty Lueck: “Trend following can be quite a challenging utility, return profile, for investors to hold on to.
Equities tend to go up, up, up, up, up and then kick you in the teeth and then recover and then go up, up, up.
Managed futures have an opposite profile where they tend to make consecutive losses and then have a very strong run that makes money.
That's intrinsically quite challenging for investors to hold onto, but it's really valuable in the portfolio.”
Next, let’s look at where the trend Barometer finished the month;
The overall Trend Barometer finished exactly where it started…at a low reading of 30…but unlike last month…I suspect that most CTAs will finish in the black…at least those who have a healthy allocation to financial markets like stocks and currencies.
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 increased from 12 to 13 during the month. The Euro and Natual Gas showed the strongest signs of trending behaviour at the end of the month.
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 in half to just 1 out of 10 sectors, confirming the complete lack of trends at the moment.
Currencies was the only game in town in Trend City.
In many respect the first seven months of 2017 resembles 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.
The question is of course…when will this challenging time for CTAs end?
To which I would answer…
When we least expect it…
Which frankly could be any time…
The last chart shows the evolution in the Trend Barometer since January 2015.
After the end-of-June “nose-dive” the Trend Barometer pretty much stayed under water for the whole moth of July
And you kinda think…
This can't get any worse, can it?
And oddly enough…even after 27 years of being in the CTA industry, frankly it doesn't get much easier going through these periods…except for the fact that…
time and time again we have seen the vital role Managed Futures and Trend Following play in a well diversified portfolio and despite its uneven return profile…it is still (in my opinion) one of the most dependable and reliable investment strategies you can find in today's investment universe.
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.