Market Trends for April 2018

Early Signs of Worst Nightmare for Investors, could be good for trends!

  Q2 kicked off with an early sign of what many investors are fearing. A sell-off in both bonds and stocks at the same time. This of course is nothing new, we saw it during the financial crisis...but the truth is that it has not happened very often in the past 30+ years, mainly because the interest rate cycle has been going down. If you are in the camp that believe the interest cycle is about 35 years long and that it changed direction in 2016 with historic lows in most fixed income markets...well you may also expect that the traditional "safe-haven" correlation between bonds and stocks may be less reliable going forward. But even if you do not fall in to this camp, and still believe bonds will provide adequate protection...allocating part of your portfolio to a truly non-correlated asset class, such as trend following, would still be a good idea.

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

On the surface, the change in the Trend Barometer from end of March to end of April, was pretty small...going from 50 to 52. And the first indications from the wider trend following and CTA industry, also suggest pretty flat performance...but I think if you look closer, you will find some managers who did quite well :-). Part of the reason, I believe, is that within a diversified portfolio, Commodities did see some nice trends, and those managers who are able to get a meaningful allocation to these markets, saw the benefit of this. 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 increased from 18 to 19 during the month, with a few landing right at the neutral reading (indicated by the "grey" shade right at the 30% level. 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. What is interesting is that 13 of the 19 trending markets all came from the Commodity side, with Energy markets showing very good trend behavior across the board. Grains and Softs also looked good in general.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state stayed completely unchanged at 1 out of 10 sectors... which is pretty much the lowest reading you can get, as it's rare to see no trending behavior in all 10 at the same time.

It kind of confirms the early performance indications of a flat month for CTA's but given that the Trend Barometer did managed to close above 50...it surprised me a bit to see that Energies was the only sector that overall showed trend behavior.

But since Commodities were the leading markets in terms for trends, it does makes sense that larger managers with much less ability to trade these markets, did not see much performance in April...and hence the CTA indices would reflect this. Looking at the daily Trend Barometer, April was certainly a bit choppy, ranging from 55 on the high side to 30 on the low side. Towards the end of the month, signs of life in the US-Dollar did start to impact a number of markets and perhaps this is what is in store for us as we approach the half-way line in 2018. After a volatile Q1...and April that still saw some decent moves in some markets, investors should make sure that their portfolio are well positioned for a more Divergent, "lively" and perhaps trending market environment going forward...and as they say "diversification is still the only free lunch in Finance".

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.