Is the Drought in Trends Finally Over?
After seven straight months of low readings in the Trend Barometer, August brought a glimmer of hope and what may be in stall for the true believers of trend following.
After a painful drought in Trends, August showed some signs of recovery. Not helped by the news cycle that unfortunately had a busy month with renewed terror in Europe and the Kim/Trump standoff.
Sadly, this is the world we live in today, and where perhaps, it is even more important than ever, to let your investment decisions be based on market prices and not the news.
But despite all of this…the number of trends increased…finally!
Is this the beginning of a new “trend”…I don't know, but never forget that historically the 4th quarter of the year, often brings the best out of the trend followers!
Next, let’s look at where the trend Barometer finished the month;
The overall Trend Barometer rallied towards the end of the month to finish at a reading of 55. I suspect that most CTAs will finish in the black…at least those who have a healthy allocation to Equities, Base Metals and Energy.
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 13 to 15 during the month. Unleaded Gasoline, Copper and Heating Oil 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 doubled from 1 to 2 out of 10 sectors, which is still pretty low.
With Copper on fire…no surprise that Base Metals was the strongest of the sectors, but Energy did show positive signs as well.
In last months update I commented on the difficult first 7 months of 2017 for trend based strategies:
And that the question on many investors lips at the moment…when will this challenging time for CTAs end?
To which I wrote…
When we least expect it…
Which frankly could be any time…
And maybe that is exactly what we saw in August!
The last chart shows the evolution in the Trend Barometer since January 2015.
And as you can see, we saw a nice rally in the last few weeks (although a slightly bumpy ride).
Of course we need much more of a sustained period before we claim victory and see the industry make new all-time-highs. But this could be the first glimmer of light at the end of the tunnel.
Personally, I would not bet against a strategy that has survived all type of environments and changes in the past 50 years+.
And here is the amazing thing about robust trading systems:
The more robust a system, the more volatile it tends to be!
PLEASE READ THE ABOVE SENTENCE AGAIN!
Thank you…now you may continue…
This is because robust systems are not optimized to particular markets or market conditions.
The converse is also true.
You can design systems with excellent returns and low volatility on historical testing, but which work only for given periods in given markets. These systems tend to be curve-fit or market-fit and are not robust.
For a system to have the highest odds of profitability over time and markets, the inescapable tradeoff is volatility.
Diversification is used of course, but it will only dampen the volatility so much.
So this is the reason that trend followers as a group is Reassuringly Volatile in there returns, yet enormously profitable over time!
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.