Market Trends for August 2019

"Category 5" Trends Boosts Performance

While Hurricane Dorian was building up to severe intensity before making landfall in the Bahamas…August also turned out to be a Category 4 or 5 when it comes to the intensity of strong trends and performance for the CTA industry.

Having gathered strength in the first 7th month of 2019, the momentum in many markets was further unleashed during the late summer month, a month that historically has proven to be full of surprises for the markets.

This year, it was not so much new themes that surprised investors but rather the level of intensity of some of the current trends...most notably the rapid drop in global interest rates, that seem to have no end in sight...especially when you listen to policy makers, like the incoming ECB President, Christine Lagarde, who only a few days ago made her views crystal clear in front of the European Parliament by saying that:

"I don’t believe that the ECB has hit the effective lower bound on policy rates." She went on to say that "All things considered, in the absence of unconventional monetary policy adopted by the ECB – including the introduction of negative rates – European citizens would be, overall, worse off."

No doubt we live in interesting and unpredictable times, but in my humble opinion, some things never change...like human behavior...which makes an investment strategy which at is core has “I don’t know” as a key design driver, not only a useful player on your team...but an essential part of any portfolio lineup that wants to avoid relegation in the coming years.

As important as it is NOT to miss a strong up Day, Week or Month in your equity portfolio...as critical is it NOT to miss the strong performance periods of trend following strategies. So far 2019, is evident of this fact, as we see many established managers reach new all time highs for their programs.

It is vital to fully embrace and trust the process of how these strategies operate and not continue to see the world like we are, but rather for what it is.  The key to successful investing is to recognize that we are just as susceptible to crippling behavioral biases as the next person...and that the best way to overcome these weaknesses, is to become a rules based investor.

Market moves this month:

Trend Barometer statistic this month

The Trend Barometer finished the month at a strong level of 59, which suggest an above average positive month, when it comes to performance of trend following strategies...and that seem to be exactly what we will get when the numbers are in.

Although we had a dip in trend strength mid month...many of the days during August produced strong readings in the Trend Barometer.

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 surged to 23...up from 12 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 26, which puts the Trend Barometer in pretty strong 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 had quite a few Grain, Soft, Meat and Currency markets. Carrying the GREEN flag (up trends) at the end of the month we see (to no surprise) many Fixed Income markets as well as the Metals.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state doubled from 3 to 6 out of 10 sectors. I think this is the strongest reading of Sectors in a trending state at month-end, that I have ever recorded since starting to post these monthly updates.

Although Interest Rates and long-term Bonds have been trending for a while, it was great to see a few other names on the list this month. Commodities in general, with the exception of Precious Metals had nice down-trends in August.

Trend following is not a new strategy, and let me illustrate this point by finishing this post with excepts from an article from TIME Magazine that appeared in May 1959 about Nicolas Darvas,(1920–1977) who was a dancer, self-taught investor and author. YES that is right...this was written 60 years ago:

Darvas:

"The only sound reason for my buying a stock is that it is rising in price. If that is happening, no other reason is required. If that is not happening, no other reason is worth considering"

“I have no ego in the stock market,” he says. “If I make a mistake I admit it immediately and get out fast.” Darvas thinks his system is the height of conservatism.

Question: Have the markets changed?

Darvas:

“Have the markets changed... In short No. You see the markets are simply human emotion reflected in $$’s. People really need to get this into their heads. It’s not about logic. Company results. Mathematics but emotion. When emotion and logic collide. Emotion will always come out ahead. The way I traded in the 1950’s and made such fantastic money was simply the same method Livermore and Barauech traded before me. I traded the same way right the way through the 1960’s and 1970’s. And I am certain it will be the same going into the year 2000. It’s all about riding huge waves of emotion to the maximum. The big money is made from these moves. It’s crazy. But we are only human…Well you see, to me my method had to make sense. I had to be able to explain it to my partner (who knows absolutely noting about stocks) and she had to grasp the reason why it worked. In short it had to have a lot of common sense about it. My Darvas method was simply looking for the most in demand stocks, in the best sectors in a market Not GOING down. I would ride them as far as the ride would let me and exit when it was over…Makes sense right? But if you ask many traders to explain their method and straight away they mention Elliot Waves, Fib. Retracements, Cycles etc…my question is always... So WHY should a stock go up because of this? I am always left with a blank expression. They simply had no valid reason to trade these stocks. It had no common sense reason to go up. And I found most complicated technical analysis is like this. Great on theory short in common sense."

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.

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.