No Crisis...Just Alpha

One of Wall Street’s Most Popular Trading Strategies Is Now Failing

Machines that decide when to buy and sell are struggling to keep up with central banks and Donald Trump.

Remember this headline from Bloomberg on March 1?

Well...as we close the month of March, it sure looks like this journalist got his timing right...that is, like other financial pundits before him, they are quick to declare the "death" of trend following...even if the evidence show that these below average performance periods have happened many times before...and they have an amazing tendency to do this near the low!

But let's not forget my headline...NO CRISIS...JUST ALPHA

I think this is really important. Trend following has become synonymous with term "Crisis Alpha" and many investors were scratching their head last year, frustrated with the performance of their CTAs/Trend followers, because it had been sold to them as a "hedge" should any crisis occur. But what I have always maintained is, that trend following is not a hedge, but rather an uncorrelated return stream. The last 4 months is a great example of this.

Quick recap: In December 2018, when stock markets tumbled, trend following strategies delivered solid performance because there were trends we could participate in, and now in Q1 2019 as stocks turned on a dime and bonds got a kick after another U-Turn by the FED, the trend following strategies delivered solid performance because there were trends we could participate in. (Yes, I know...I just repeated myself...but that is because it's important). We need trends to perform, and when they are there, we do our best to make the most of them.

Market moves this month:

Trend Barometer statistic this month

The Trend Barometer finished a month at a neutral level of 39. As early performance indications are quite strong, it may seem surprising that the Trend Barometer could not muster a higher close. I think the answer is that the performance this month was driven by a relatively small sub-set of the 44 markets being tracked.

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 at the end of  the month was 16...down from 18 , and even if we include those ending right at the neutral reading (indicated by the "grey" shade right at the 30% level) we only get back to unchanged compared to February. 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 clear divide between RED dots (down trends) in the Grain sector, the Euro and Coffee...whilst Fixed Income, saw a lot of GREEN (up trends) joined by a couple of stock markets at the end of the month.

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 2 to 3 out of 10 sectors... which is still a relatively small number of trending sectors.

Not surprising it was Bonds and Interest Rates (up trending) and Grains (down trending) that were the sectors showing consistent trends at the end of the month, in line with the individual market trends.

Undoubtedly the coming month will be full of surprises on the political front and for our friends in the UK, it could be the first year where the end of May comes before the end of April.

Regardless of how BREXIT plays out, the world is in constant motion, economically as well as politically and in a world of constant change, it makes sense (at least to me) to have a healthy portion of any portfolio allocated to a strategy that for the past 50+ years have been used to dealing with uncertainty and change.

As can be seen below, the Trend Barometer spent March in a relatively tight range, which kind of confirms that we don't need a big crisis where all markets suddenly move strongly, in order to make money. A couple of sectors that show persistent trending behavior can be enough to deliver a solid portion of "JUST ALPHA".

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.