Is this the begining of something bigger?
Last months post was headed “Calm before the Storm?”…and little did I know, that only a few days in to October, the storm would be blowing across many markets, but in particular Equities and Energies.
Now as most of us know, if you are positioned the wrong way when the storm first hits, you are going to get hit and loose your balance for a little while, until you adjust your posture…and this was the case for many of the trend following strategies this month. It wasn't as bad as the first time it happened this year (back in February)…but it was still painful.
I think we are going to see a lot of return dispersion this month as exposure to Equities, Energy and to some degree Fixed Income markets, will be a big factor in how bad the strategy fared.
Historically October has been a month of heighten volatility and this year did not disappoint, but to me it does feel like this could be the beginning of a lot more volatility and where extreme economic policies in recent years are starting to crack.
As Ray Dalio said only last month, we are probably in the 7th inning before the next crisis emerge in a couple of years.
Now, let’s look at where the Trend Barometer finished the month;
The Trend Barometer finish right at its Neutral level of 45…unchanged from last month…but that is not the whole story…
Because the Trend Barometer nose dived in the beginning of October and the very low levels we saw during a good part of the month reflecting the loss of trends is where the real story is to be found.
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 by 5, from 22 to 17 during the month, but if we include those ending right at the neutral reading (indicated by the “grey” shade right at the 30% level) we get back to 20 and close to where we left off in September. Please note that for the individual markets a reading of 30 is considered neutral as opposed to the Trend Barometer itself, where this level is 45.
By far the majority of the trends to down-side trends, as indicated by the RED dots…only Palladium and the Euribor finished in an up-trend. The strongest down-trends were Swiss Franc, Euro, Alluminum and RBOB.
In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state remained at 2 out of 10 sectors… which continues to be really low.
Currencies and Base Metals were the only sectors showing consistent trends at the end of October, both of them to the down side.
So far Q4 has started very differently from last year's strong performance for trend following strategies, but it's still early days and there are plenty of trading days left of the year to change this.
Although many investors may be disappointed with the lack of protection from trend following strategies so far in 2018, we need always to understand the difference between negative correlation and non-correlation. We also need to appreciate the difference between short term corrections and a real crisis. So far 2018 has not been a crisis year, but rather a year that has cost trend followers dearly within 2 short periods of time…and these strategies have never been build to deliver a “hedge” during such events. They may from time to time do so, but that is probably more down to luck of positioning.
The real value of having an non-correlated strategy in your portfolio will show up in the long run, like we saw during the Tech Bubble and Global Financial Crisis, which is why we need to apply the same discipline to our overall asset allocation as systematic managers do in their day-to-day implementation of their strategies.
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.