Market Trends for December 2016

2016 - A Year where Change seem to be the ONLY Trend...

For trend followers, 2016 will go down as a challenging year, with a couple of big events that had a big influence on the year's performance. In fact, looking at the BTOP 50 Index (consisting of the 20 largest investable CTA programs), the performance looks to be on par with 2009 and 2011, which has been the worst 2 years since 1990 for the BTOP 50 index. Perhaps I should add, that we are only talking about losses of less than 5% for the index during those years and compared to many other types of investments...that ain't so bad. In most cases, trend followers were on the right side of one of these events (BREXIT) but on the wrong side of the other (Trumps election victory), but some managers may argue that it was a year of no big events, outside the norm. Personally, I would argue against this view, because of what happened during 2016 in one of the big market sectors, which could turn out to be very significant for investors going forward. I am of course referring to the likely low in the 35-year interest rate cycle in the US, that had seen falling rates from 1981 to the summer of 2016. (the previous low was in 1946....precisely 35 years prior to the high in 1981).

The change of direction in interest rates is likely to have an affect on many markets in 2017 and beyond, as well as asset flows from investors around the world.

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

At the end of play on December 30th, the trend barometer finished just above the neutral zone, suggesting a positive month for most trend followers. This is further evidenced by the fact that during the month of December, the trend barometer had in fact been comfortable above the neutral point. We did see however a move down from the mid-50s to the closing of 48 during the last 3 days of the year, where I suspect a lot of managers saw their returns trimmed down a bit. 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 decreased from 20 to about 16 during the month. Many markets in the Stock Index sector showed strong trending behavior as well as a select group of commodities such as Cocoa, Coffee and Live Cattle. In addition to these markets, a couple of fixed income and currency markets also ended the month in a generally trending state.

In the chart below, I have grouped the markets into 10 sectors. Like last month, just 2 out of 10 Sectors finished the month in a trending state (Stocks and Meats). 

2016 was a year where not many sectors trended at the same time, making it difficult for trend followers to make any real headway. It was also unusual in the sense that we had only 6 months of the year where the trend barometer finised below 45, which normally would suggest a positive performance year for the BTOP 50 index. In the previous 4 negative years for the BTOP 50 index (2009, 2011, 2012 & 2015), we had usually 9 calendar months with the trend barometer finishing below 45, although 2015 only had 7 of such monthly readings.

The last chart shows the evolution in the Trend Barometer since January 2015. As mentioned above, the overall trend environment was generally good during the month of December, which suggests a positive finish to a difficult year.

Looking back on the year using the chart below, it is clear that the good periods for trend followers were concentrated to the first couple of months and last month of the year...with a long period in between of challenging market environment.

I know that understanding the conditions for trend followers via the Trend Barometer is not going to convince all of my readers to allocate a portion of their portfolio to this strategy, but the question in my mind is...Do you don't want to convince 100% of the people 10% of the way, or do you want to convince 10% of the people 100% of the way, and I truly hope you will fall in to the 10% category.

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.