No Let Up in Trends...Despite Trump vs. Powell Skirmish
The hot month of July was not as quiet as you would expect, when lots of investors put on their "email auto responder" saying, "...I'll be out of the office with limited access to email..." - clearly they did have access to their trading terminals as market prices continued to move in a trend friendly and divergent fashion.
After a long month of waiting, the Fed finally delivered the much anticipated cut in US rates, the first cut in over 10 years (despite delivering a generally upbeat statement about the economy, saying that job gains have been “solid” and growth was occurring at a moderate rate”). They also took the opportunity to announce the early retirement of the program to shrink its balance sheet, known as QT (quantitative tightening), where the final episode showed that over its 22 month stretch, the Fed’s total balance sheet assets fell by 15.2%, for an 8.6% simple annualized pace...but despite all of this, the Fed also managed to disappoint the stock market. But perhaps not as much as a certain tweet that came out in the early hours of August 2nd in relation to the US-China trade negotiations.
Two new words from the Fed…”mid-cycle adjustment”… clearly sent the so-called experts in different direction in terms of what this really mean.
Could it be the beginning of the end of the longest expansion in US history? We need only to be reminded, that we've had a “secular peak”, at the last year of the decade for many cycles. 29, 69 in equities, 79 in commodities, 89 in Japan, 99 in Tech. 2008…okay, was a year early, so perhaps 2019, will also go down in history as an important point in time.
But whatever "mid-cycle adjustment" really mean, this did not spoil the 2019 (to-date) party for trend followers, who continue to build upon the strong first half performance.
Market moves this month:
Trend Barometer statistic this month
The Trend Barometer finished the month at a low level of just 30, which normally would suggest a negative month for most CTAs and Trend Followers in particular. But that is not what early indications are suggesting.
I suspect the reason for this, is that part of the month was spent at higher levels for the Trend Barometer, which peaked around 63 early in the July. This combined with very strong performance in a couple of sectors, meant that managers were able to hold on to the gains, despite general trend strength weakening in the second half of the month.
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 dropped to 12...down from 15, and even if we include those ending right at the neutral reading (indicated by the "grey" shade right at the 30% level) we only get up to 13, which puts the Trend Barometer in a "negative" territory. 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 only find a few Currencies and Lean Hogs. Carrying the GREEN flag (up trends) at the end of the month we see a few Fixed Income markets, a couple of Metals (Gold & Silver) & as well as Australian Stocks.
In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending stayed unchanged at 3 out of 10 sectors. Still not super strong, but enough to finish the month on a positive note, especially because the fixed income sectors hold a good number of markets in them.
Like last month, it was short-term Interest Rates and long-term Bonds (up trending) and but this month joined by Precious Metals due to the upward price moves in Gold and Silver.
2019 is so far a good example of how 200 year old golden rules still work, despite many times having been deemed primitive and outdated.
In 1838, James Grant published The Great Metroplis, Volume 2. Within, he spoke of David Ricardo, an English political economist who was active in the London markets in the late 1700s and early 1800s. Ricardo amassed a large fortune trading both bonds and stocks.
According to Grant, Ricardo’s success was attributed to three golden rules:
"As I have mentioned the name of Mr. Ricardo, I may observe that he amassed his immense fortune by a scrupulous attention to what he called his own three golden rules, the observance of which he used to press on his private friends. These were, “Never refuse an option* when you can get it,”—”Cut short your losses,”—”Let your profits run on.” By cutting short one’s losses, Mr. Ricardo meant that when a member had made a purchase of stock, and prices were falling, he ought to resell immediately. And by letting one’s profits run on he meant, that when a member possessed stock, and prices were raising, he ought not to sell until prices had reached their highest, and were beginning again to fall. These are, indeed, golden rules, and may be applied with advantage to innumerable other transactions than those connected with the Stock Exchange.
The rules “cut short your losses” and “let your profits run on” are foundational philosophies of momentum.
Following in Ricardo’s footsteps are some of Wall Street’s greatest legends who implemented momentum and trend-following techniques.
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.
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.