Reversals in Oil, Bonds & Stocks…marked a difficult November
November picked up where October left off, with more headline gripping market moves. In Energies alone we saw more action than we normally see in a whole year, with oil related products continuing their relentless drop, whilst Natural Gas turned up the heat with an impressive rally.
Stocks ZigZagged whilst Short Rates and Bonds put in a strong performance (against the bigger down trend), making life difficult for medium to longer term trend followers. The USD stayed strong, whilst the broader Commodity markets range traded with a downward bias.
Now, let’s look at where the Trend Barometer finished the month;
The Trend Barometer finished at a respectable level of 55…up 10 from last month…but having also hit some very low levels earlier in the month, this finish did not get reflected in the performance of CTAs…
I would go as far as saying that the way markets have moved in 2018, has not only made it impossible for trend based managers to find profitable trends, it has also made it difficult for the Trend Barometer to give a good reflection of the trend environment.
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 was unchanged at 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 24 which reflects the above average reading. 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.
We saw a lot of RED dots (down trends) in Energy, Currencies…whilst European Fixed Income as well as the Japanese JGB had most of the GREEN color at the end of November.
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.
Not surprising it was Bonds (up trending) and Energies (down trending) that were the only sectors showing consistent trends at the end of the month, but it is worth noting that these two “trends” were against their recent sector trends…and these reversals have been a big part of the challenges that medium to long term trend following strategies have been facing.
Since 1999, the 3 best months of performance for managed futures, represented by the SG Trend Index, have been November, December and January… but as November did not live up to this reputation, let's see if December and January can make up for this.
The current macroeconomic and political backdrop makes a complex, yet compelling case for the fuel that drives the types of market price movements that create profit opportunities for trend followers.
A slowing China, trade wars, global political and social tensions, the widening wealth gap, rising populist sentiment in Italy and elsewhere in Europe, BREXIT, the current runaway debt cycle, the coming political cycle, current rising interest rates and falling equity markets, not to mention rising volatility in all of the commodity markets are all setting up for an interesting and possibly painful time for those investors who decide not to include truly uncorrelated strategies in their investment portfolios.
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.