Market Trends for January 2019

From the Worst December since 1931 to the Best January in 30 Years

You couldn't make up these headlines even if you tried.

...but the stock markets seem to be going from one extreme to another. And of course, as many of you know...ZigZagging markets like what we have just witnessed in the US, are not ideal for those who try to capture medium to long term trends.

So after a solid December, trend followers found themselves playing defense as best they could, just like in this weekends 2019 Super Bowl.

January is also the month where each year I get to spend time with my peers at 2 of the worlds largest hedge fund/CTA conferences in Miami. After a challenging 2018, I was a little anxious about the feedback from investors in trend following...after all, many of them have not had much to cheer about in the last few years.

But to my pleasant surprise, my conversations (some of which will be coming out on the podcast shortly) were very different to what I had expected.

Overall, investors understood that last year, the lack of trends made it impossible for trend followers to make money.

They also appreciated that after 10 years of QE where traditional assets have been inflated, it's natural that their diversifying strategies have not been able to keep pace, and at the same time, they were committed to keeping these diversifying strategies since we sooner or later will be facing a long period without QE type stimulus from the authorities.

And many of the investors, even expressed their intention of adding to this part of their portfolio.

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

The Trend Barometer finished the first month of 2019 at a level of 39...down form 66 last month...and this drop is reflected in CTA performance for January. Indeed early indications suggest that all main CTA indices are down in January...continuing the negative correlation to equities (but not in the way investors prefer).

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 noise dived to 16 during the month, but even if we include those ending right at the neutral reading (indicated by the "grey" shade right at the 30% level) we only get to 17 which reflects a pretty weak 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 GREEN dots (UP trends) in the Fixed Income and Base/Precious Metals sectors...whilst only Lean Hogs recorded a down trend (RED dot).

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state declined from 4 to 3 out of 10 sectors... which reflects the trend changes occurring in many sectors.

Not surprising it was Bonds and Interest Rates and Precious Metals that were the sectors showing consistent trends at the end of the month.

I want to finish with a quote from my recent conversation (you can find it on the podcast) with MIT Professor Andrew Lo, where he talks about the current investment environment;

In an environment where there’s general political uncertainty, people are going to want to keep their powder dry. It’s like going into a Las Vegas casino. If you’re a card counter, and they don’t catch you, because we know that card counting is not permitted in these casinos, but if you go into a casino and you’re a card counter, and you have expertise, you have an edge, you will definitely be able to earn a better rate of return than a typical gambler who is just going there for fun.

So, these professional poker players are clearly going to earn a higher rate of return. But, imagine going into a casino where you sit at a table, and the dealer says, “Well, we’re going to play a game, but I’m not going to really tell you what the game is. Moreover, whatever you think the rules are? Along the way, I get to change the rules without telling you when I’m going to do that, and why I’m going to do that. How many professional poker players do you think will want to play in that kind of a setting? My guess is very few.

That’s what’s happening right now. Because of the political uncertainty, a lot of investors are saying, “You know, I don’t really want to play. I’m going to keep my capital to the side until we see a much clearer direction for the economy.”

That process of capital withdrawing from markets and trying to find a home where they understand what the rules are, that is an environment that is very difficult for any investor to be able to generate returns.

As can be seen below, the Trend Barometer really took a knock in the first few days of January after the Plunge Protection Team stepped in to save the stock markets yet again...but most trend followers did well in reducing looses from these artificial market intervention...and live to fight another day!

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.