Market Trends for December 2018

2018 is over...phew!

  Can we just be real for a minute? 2018 was a roller coaster of a year...and one of those years where you could easily feel a bit sick to your stomach when you looked at the performance of your investments. (at least it was for most trend followers)...but lately even hardcore equity bulls have felt the pain, just like bond investors did until a couple of months ago. Indeed 2018 will be remembered by many investors for its lows, rather than its highs. For trend following strategies, measured by the BTOP50 Index, it was the 8th negative year since 1990 (and 4th consecutive year with a small loss)...but 7 of these 8 years have occurred since 2009, when central banks began their various forms of market manipulation. It is hard to argue that markets have not been affected by the artificial monetary policy we have seen since the debt crisis.

But as Ray Dalio has been quoted by saying very recently...we are in the 7th or 8th inning before the next big crisis...so having a strategy like trend following on your team, is probably not a bad idea, despite the recent struggles.

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

The Trend Barometer finished a difficult year at a strong level of 66...up 11 from last month...and this should be reflected in CTA performance for December. Indeed early indications suggest that all main CTA indices are up in December...providing the long awaited negative correlation to equities. 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 was unchanged at 27 during the month, but if we include those ending right at the neutral reading (indicated by the "grey" shade right at the 30% level) we get back to 29 which reflects the strong reading. 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. We saw a lot of RED dots (down trends) in the Energy and Equity sectors...whilst Fixed Income, Precious Metals and a few other select Commodities ended in the GREEN at the end of December.

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 2 to 4 out of 10 sectors... which certainly helped delivering the positive performance.

Not surprising it was Bonds and Interest Rates (up trending) and Equities as well as Energies (down trending) that were the sectors showing consistent trends at the end of the month.

Since 1999, the 3 best months of performance for managed futures, represented by the SG Trend Index,  have been November, December and January. We already know that November did not live up to this reputation. But as December continued to earn it's stripes as a good month for trend followers let's see if January can keep up its reputation.

Their seem to be no shortage of events lined up for investors looking into 2019, that can really move the markets. And since no experts came out 3 months ago to predict the bear market in equities let alone the massive drop in the price of FAANG stocks (many of them down more than 30% in just a few weeks)...markets continues to remind us that the future can not be predicted. With that in mind, I continue to believe that TRUE Diversification is the best way to protect your portfolio during difficult times and still have the opportunity to build substantial wealth over time.

As can be seen below, the Trend Barometer has been climbing steadily in the past 3 months as uncertainty rose...let's hope and believe that this "trend" continues and that investors in trend following strategies will see better opportunities in 2019. HAPPY NEW YEAR!

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.