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Market Trends for December 2019

End of the Lost Decade of CTAs...well it depends!

A lot of critics have labeled the last 10 years as the "lost" decade for CTAs and trend followers. And sure, with just 19.25% to it's name in the last 10 years, the Soc Gen Trend Index, admittedly did not knock it out of the park during the 2010's.

But this is still better than the -9% return that the S&P TR index saw during the previous decade (2000 to 2010)...oh and with a 51% drawdown along the way.

But just because an index did not do so well, does not mean that some of it's underlying constituents suffered the same fate. And since few investors really want to be "average", the job really is to find the stocks or managers that stand out.

The trend follower that I know best... produced a net return of app. 145%, with a correlation to the S&P of just 0.03!

70% of its monthly returns, 89% of its rolling 3 year returns and 100% of its rolling 5 year returns were positive during the last 10 years.

By no stretch of the imagination was it a lost decade!

The difficult environment for trend followers in recent years has been well documented by the Trend Barometer, but perhaps we should take it as an optimistic sign that it finished the decade at a very strong level of 68! Time will tell.

Market moves this month:

2019-12-31 Monthly - Finviz Weekly Performance

Trend Barometer statistic this month

2019-12_TB with Heading

The Trend Barometer finished the month and the decade at a strong level of 68, but we are likely not to see this reflected in the returns of CTAs as the last couple of days of December saw corrections in current trends, pretty much across the board.

The continued transition in the markets from Risk-Off earlier in the year to Risk-On has kept the equity sector trends well supported, whilst putting pressure on Fixed Income markets leading to and overall down-trending state.

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 at the end of the month rose to 24...up from 16 in the previous month, and if we include those ending right at the neutral reading (indicated by the "grey" shade right at the 30% level) we get up to 30, which leaves the Trend Barometer in a strong overall state. 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.

In the RED camp (down trends) this months, we mainly saw Fixed Income markets, with the German Bund struggling the most, as well as Natural Gas. Carrying the GREEN flag (up trends) at the end of the month we see BeanOil leading the charge after a healthy 14% jump in December. Precious Metals, some Base Metals, Softs and many of the of the Equity markets tracked by the Trend Barometer.

2019-12_Markets with Heading

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state, increased to 4 out of 10 sectors. This is towards the higher end of the scale we have seen all year.

2019-12_Sectors with Heading

There is no point in dwelling too long on the past decade as it seem to me that we are facing a very interesting one ahead of us.

Allow me to introduce R. Buckminster Fuller (1895 - 1983).

Despite starting his career by being expelled from Harvard University in 1913, after excessively socializing and missing his midterm exams, in 1983, shortly before his death, he received the Presidential Medal of Freedom, the US's highest civilian honor, with a citation acknowledging that his "contributions as a geometrician, educator, and architect-designer are benchmarks of accomplishment in their fields."

At this point, you may ask why I bring this up as we enter 2020?

Fuller during his work, estimated that by the year 1900, the information...the knowledge of the human race was increasing at a rate of about twice every 250 years. In other words, every 250 years you would double the knowledge of the human race.

But by 1900, it was double every century... in other words, much faster than expected. By 1945, he said it was doubling every 25 years and by 1982 doubling every 12 to 13 months. And then IBM did an estimate that by 2020 (see where this is going) which is where we are today, human knowledge would be doubling every 12 hours!

So let's think about this from the point of an investor. How are you going to comprehend the world you are trying to invest you hard earned money into, if the knowledge base of all humanity is doubling every 12 hours?

You think you "know" because you studied a particular stock or a set of macro economic data, and you feel confident "knowing what you know" and yet with a doubling of the knowledge base every 12 hours, you can't possibly keep up with that.

And so it raises at least to my mind, the value of "data" besides the only true data point we have, namely the price of a market at a given time.

What are the type of investment analysis tools that you currently rely on, that may not be so relevant anymore? And what happens when investors realize that the old way of doing things does not work as it used to?

"Knowing what you don't know" the old trend following philosophy suddenly gets new meaning, and perhaps much more relevance than it has every had, as we venture in to this new decade.

Not having to rely on "prediction" and "educated guesses" about earnings and future monetary policy (which by the way, the last decade have shown can be very different to what we have ever seen before...think negative yielding Junk Bonds for a start) should be a relief to all investors.

Embracing rules-based strategies that overcome fragile human biases and blending them into traditional portfolios, where ALL the evidence...let me repeat that... ALL the evidence, suggest that you can achieve higher long-term returns with less risk, should no long be up for debate. It is not my opinion. It's what the data and evidence confirms. It's the TRUTH!

I know that I, to a large extent, is preaching to the choir in this post...but frankly a few of you are still watching from the sideline and it is my hope that during 2020, you will make the leap and start building safer and better performing portfolios that can better withstand the market turbulence that we no doubt will be facing during the next decade.

If you want to check the current state of trend following, join me each weekend on The Systematic Investor Series, where we give you a raw and honest account of what it's like to be a rules based investor and share with you which trends are happening right now.

2019-12_TB - 6 months Evolution


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.