Market Trends for October 2016

Bonds Spoil Year for CTAs...at least for now!

It wasn't just Halloween that scared investors in the month of October. News of economic strength increased expectations of central bank actions to raise interest rates and drove bond futures down throughout the month.

The Trend Barometer itself, never managed to recover from September's low to levels that would be considered a good environment for trend followers and spent the whole month of October below the level of 48 - suggesting that a tough month for these strategies are to be expected.

But there was one sector that above all, that grabbed the attention of most investors, namely Bonds and since the long-term trend has been up for quite a while, this is where most of the "damage" to CTA performance is to be found.

Firstly, let’s look at where the trend Barometer finished the month;

At the end of play on Monday, October 31st, no real change had been recorded since last month and the low level of the Trend Barometer at month-end will be confirmed by negative performance in all main CTA indices. The next chart below shows a snapshot of a 44-market portfolio with markets listed in “groups” of market sectors;

The number of markets in a trending state, increased from 12 at the end of last month to 13 at the end of October. In the Fixed Income sector, we saw for the first time in a very long time, a market entering a down-trend, whilst the Equity sector was quite mixed. Dollar strength, led a number of currencies to end October in a down-trend against the Greenbag. The Energy sector ended completely trend-less whilst Base Metals saw decent up-trends at month-end. In the Commodity sectors, Cocoa continued in a down-trend whilst Coffee ended in a strong up-trend mode, together with BeanOil.

In the chart below, I have grouped the markets into 10 sectors. Just 1 out of 10 Sectors finished the month in a trending state (Base Metals). 

There is not doubt that returns in the month of October will be largely attributed to the level of exposure to Bonds and Short Term Rates in the individual CTA portfolio's due to the large reversal that we saw during the month and that it is to be expected that those managers with a relatively long-term time horizon will be hit the hardest, as there were not enough opportunities in other sectors to off-set these losses.

The last chart shows the evolution in the Trend Barometer since January 2015. As mentioned above, the overall trend environment has been low since the decline from the highs in July.

but with the US election being only one week away...where it seems like anything can happen, perhaps it is for the better that some exposures have been reduced significantly in recent weeks due to lack of trends, before entering what looks to be a very tight run to the finish line for Hilary and Donald!

These times remind us that it is very hard to predict the future, so perhaps having a strategy like trend following, which is predicated on Knowing What You Don't Know, in your portfolio, may well turn out to be an important insurance policy in the coming months and years.

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. P.S. if you want to follow the Trend Barometer on a daily basis, please click here and if you want to see the list of Market Symbols explanations, please click here.