Market Trends for November 2019

The odd one out... Black Wednesday!

There was Black Friday in 1869, when the gold and stock markets collapsed after being driven to record highs by speculators trying to corner the gold market. And Black Tuesday and Black Thursday of 1929 probably need no introduction…Then there was Black Monday in 1987, when the Dow Jones Industrial Average (DJIA) finished the day down 22.6%, the largest one-day percentage drop in history.

These days we have Black Friday every year...but with a different meaning of course...but from a trend following/CTA perspective, this year coincided with the end of November...which looks like finishing in the Black for all the usual CTA indices.

My own Trend Barometer, finished at a reading of 48, slightly above its daily average since 2015 of 42.

Market moves this month:

Trend Barometer statistic this month

The Trend Barometer finished the month at a somewhat neutral level of 48, which is like to lead to mixed return in the +/- 2% range for many managers...but with a slight positive bias.

This was in any event a welcome lift from the depressed levels in October, which saw the lowest daily reading since 2015 of just "9".

The current transition in the markets from Risk-Off earlier in the year to Risk-On continues with significant trend strength building up yet again in the equity sector.

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 rose to 16...up from 10 in the previous month, and if we include those ending right at the neutral reading (indicated by the "grey" shade right at the 30% level) we get up to 21, which leaves the Trend Barometer in a neutral territory. 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.

In the RED camp (down trends) this months, we see markets like the Yen, Swiss Franc, Nat Gas, Lead, SoyBeans, SoyMeal and Lean Hogs. Carrying the GREEN flag (up trends) at the end of the month we see Coffee after it's 20% rise during the month, Live Cattle, Wheat, Palladium and of course all of the Equity markets tracked by the Trend Barometer.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state, stayed level at 1 out of 10 sectors. Another piece of evidence that shows the transition that many markets find themselves in at the moment.

As we head in to the last month of the year and this decade, investors may be reminded about the saying "Diversification Means (almost) Always Having To Say You’re Sorry". Dr. Daniel Crosby makes some great points in his books about Diversification;

"At its essence, diversification is applied humility in the face of an uncertain future. I think of diversification much the same way that insurers think of providing coverage. Just as some insured folks will have accidents that trigger a payout every year, many more will not. Insurance companies make money because their risk is diversified across the corpus of those paying premiums. Similarly, when you are diversified between and within asset classes, the failure of one single type of investment does not dramatically diminish your odds of long-term success.

Think of diversification as a form of regret minimization. Some investors will regret missing out on huge gains while others will regret participating in huge losses. Which regret will wear worse on your emotions?

Now, before you answer, let me say that the research suggests fairly unequivocally that you will regret participating in losses more than you will regret missing out on huge gains. Daniel Kahneman and Amos Tversky found when examining the utility curve for gains and losses that we hate losing far more than we love winning.

Tennis star Andre Agassi put this into words well when he said, “Now that I’ve won a slam, I know something very few people on earth are permitted to know. A win doesn’t feel as good as a loss feels bad, and the good feeling doesn’t last as long as the bad. Not even close.”

Perhaps you are the rare breed of human that feels the pain of missed gains more than the pain of realized losses (...I don't really think you are). In that case, get uber-concentrated and prepare for a wild ride. But if you’re like most of us, diversification goes a long way toward decreasing volatility en route to meeting our long-term financial goals."

If you want to check the current state of trend following, join me each weekend on The Systematic Investor Series, where we give you a raw and honest account of what it's like to be a rules based investor and share with you which trends are happening right now.

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.