Market Trends for February 2017

Trend Followers continues to outpace Short-Term managers in February...

The return disbursement between Short-Term managers and Trend Followers continue to widen as we head in to the official month of Spring. Early indications show the two strategies delivering very different outcomes in a month that on the surface looks difficult for both, given the generally low reading of the Trend Barometer during the full month of February. It brings me back to a point made last month...that trend followers don't always need sustained periods of time with high readings of the Trend Barometer to make money. February was one of those periods. That is why...

"the best way of having long-term success as an investor in trend following is to give it a permanent seat in your portfolio"

According to Tony Robbins, the US coach who has worked with Paul Tudor Jones for more than 20 years,...if you missed the best 10 trading days in the US equity market in the last 20 years...your return would be almost halved!...

Trend Following is the same...if you miss just a few of the strongest Up months, because you try to time it...you will significantly reduce your long-term return (let alone the "protection" benefit)

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

At close of play of the shortest month of the year, the Trend Barometer stood below the break-even point...but above last months close. And the strong performance of trend followers can't really be explained by the overall trend environment. Instead, February was unusual in the sense that a few markets in one specific sector looks to having been the primary source of the performance...can you guess which one? Stocks...Yes the Trump rally continued it's course which allowed trend followers to get back into the Black for 2017! 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 9 to 12 during the month. During the month we saw a shift towards Stocks and some Fixed Income markets, although the single strongest trending market was Aluminum

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state remained extremely low just 1 out of 10 sectors.

I repeat my quote from last months issue: "When you see just one out of 10 sectors trending, you are tempted to say...it can't get much worse than this...and I wonder if this could be one of those periods where you simply have to buy in to the current drawdown."...well at least we are off to a decent start! I also think that, this is a time to embrace the high uncertainty through specific choices but not specific predictions.

The last chart shows the evolution in the Trend Barometer since January 2015. The daily reading of the Trend Barometer, shows very limited periods of strong sustained trends in the last couple of years...which is consistent with the mixed results in 2015 and 2016.

So you may argue that we are due some kind of market disruption sooner rather than later, in order to bring the average performance of CTAs and trend followers closer to the long term average returns...and many people would argue that after 8 years of an equity Bull market without a serious correction (Bear Market), we are inching close to this for each days that passes by

So just as some investors are giving up on the space...the smart investors are adding to their trend following exposure, joined by new investors coming to the realization, that the only free lunch is still true diversification.

The question is...which type of investor are you and how much "protection" / diversification do you have in your portfolio?

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.