Market Trends for December 2017

2017 turned out to be a "typical" trend following year!

  2017 really had the hallmark of a typical trend following year. After a decent start, trends vanished and managers following this methodology went into a multi-month long period of losses, and for some, losses that dragged them into their worst draw down ever! But...out of the blue, trends came back with a vengeance! And as they did, so did performance of trend following strategies. For the best-in-class managers, this meant that the reputation of Q4 being historically a strong period for trend followers came true, with some managers delivering more than 20% return during the last 3 months of the year. The energetic come-back also meant that a few of the best (but not necessarily the biggest) trend followers , are closing 2017 at New All-Time Highs! So the BIG question that investors should always be asking themselves at the beginning of 2018 in my opinion is..."What did we learn in the past year?"

For me 2017 was a great example of how difficult investing in trend following can be for investors who are looking for the nice steady return each month, and are willing to accept the sometimes big (and usually unexpected) loss from time to time. Think Tech Bubble and Housing Bubble Kind of what you get if your portfolio consists of long-only equity or bond investments, really. But if you are willing to accept that higher volatility in returns does not necessarily equal higher risk, AS LONG AS YOU FOLLOW AN ADAPTIVE investment strategy, such as a professionally managed trend following approach, then 2017 was  really quite typical and in some respect, pretty un-dramatic. One really important point to take away from the past year, is the fact, that trend followers were able to make money, WITHOUT any financial crisis. Yes, it is true that the return-stream from a trend following strategy is often referred to as Crisis Alpha...and for good reason...but a good trend follower should be able to make money with or without a crisis. Just like the strategy did in 2014. This is what makes the strategy NON-CORRELATED over time...which in my opinion is why it is such a powerful component within a well diversified portfolio.

The Bull market that started in equities in 2009, has now run for 9 years, and almost in a straight line when it comes to the US markets. If you believe that this will continue forever, then you may feel that trend following is not needed in your portfolio. But in my opinion, that is a risky bet to make, because history suggest that crisis come on a regular basis and they always seem to surprise even the best market commentators. And I would go so far as to say that we should all stop intentionally, knowingly, consciously limiting, restricting, constraining our portfolios, so that they become so dependent on bull markets in bonds and stocks in order to deliver a decent return. In fact we should all strive for building "All-Weather" type portfolio's in lack of a better word. Onward...

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

The overall Trend Barometer strengthen during the month of December and finished at a reading of 48...what I would consider as slightly positive. Early indications are that all CTA indices with a healthy exposure to trend following will be positive for the month and the year as a whole, as confirmed by the trend barometer. However, for short-term strategies, 2017 was probably one of the worst years on record, most likely to do with the collapse in volatility. 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 13 to 19 during the month. Strongest trends were recorded in Energy, with other commodities, such as Base Metals and a handful of other markets also providing decent trends. Finally some Currencies also finished the year, showing signs for trending behaviour.

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 from 1 to 2 out of 10 sectors... still a low number which we have seen many times in 2017.

But it may surprise you to see that Stock markets, which have often been among the few trending sectors, dropped out in December and that Energy and Base Metals were the two trending sectors left standing at end of play.

It actually makes me very optimistic about the future, as I do believe that we will experience periods where many more sectors will start to trend at the same time... 2017 was not a great year for the CTA industry, when it comes to performance, at least not if you look at the industry benchmarks (which of course is just an "average", and does not showcase the best in breed managers well) - but it does reflect well of the tough environment that we saw during the year and which was confirm by the low readings in sector participation each month during 2017.   The last chart shows the daily trend barometer chart for the past 3 years. 3 years of below average performance for the industry as a whole, but as it is easy to see...explained by 3 years of few periods with sustained trending behavior in the 44-market portfolio that I track. But as mentioned. The trend barometer describes the industry as a whole...the average... but as investor, it is your job (and responsibility) to go out and source the best-in-breed managers that I'm convinced will continue to deliver an above average return and risk profile for their clients. But... don't get dazzled by short track-records that seemingly have found a way to deal with this recent type of market environment. don't be fooled by the cheap trend following offerings that do NOT reward the manager for delivering great performance. In my opinion, you get what you pay for and as in any business, experience is priceless and managers who can demonstrate that their approach has not only survived real crisis periods but also continues to thrive during this recent low vol, but potentially high risk environment...is always worth having on your side! Best of luck in 2018 and thanks for your continued support!

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.