Market Trends for October 2017

What went "wrong" in October?

  So what went "wrong" in October? I mean, much of the financial press (at least those selling financial news letters, where fear is a well-known emotion to appeal to) had been talking about the 30 year anniversary of the Black Monday stock market crash and how it was likely to return to the markets. And then you had those commentators who had yet again been calling for the "Death of Trend Following" after a prolonged period of time with few trends, as proof that perhaps the most dependable investment approach in history, had suddenly stopped working (again!). The fact is that future is impossible to predict and thus it's better to accept the philosophy of "Knowing What You Don't Know" and build your portfolio by using strategies that are uncorrelated. When you do this...you also have to accept that not all strategies will perform all the time. Let's not forget that it took some stock markets more than 10 years to get back to new highs after the Tech Bubble burst in 2000. After all, trend following has never seen this kind of lengthy drawdown.

When I wrote about Shrek in my last blog post and the relevant question of "When Are We There?"...I had no idea that what looked to be "Far Far Away" (meaning a return of strong trends)...was just around the corner.

Let's take a closer look...

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

The overall Trend Barometer rose strongly into the end the month and finished at a reading of 66...well above the break-even point of 45. Early indications are that all CTA indices will finish with solid numbers for the month, as confirmed by the trend barometer 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 surged from 12 to 25 during the month. Strongest trends were recorded in energy markets, such as Brent and RBOB, but pretty much all sectors had some markets finishing in a trending state, with the exception of the Softs.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state tripled from 1 to 3 out of 10 sectors, and frankly I can't remember when we last saw 3 overall sectors trending at the same time.

It probably comes as no surprise that Stocks led the way with Energy a close second.

Will this be the start of something special for trend followers...like 2014? I don't know!

But as Bill Dunn, the founder of DUNN Capital would always say when asked about when is the best time to invest? The best time to invest is at the bottom of a drawdown...the second best time...is TODAY.

Last month was the first time I showed this long term evolution in the Trend Barometer...all the back from January 1990. I did this because I had to check if we had experienced such a prolonged period of trendless markets in the last 3 decades. What I found was that the only other time we had come close, was in fact the period leading in to 2014, the best year on record for CTAs in a very long time. Is this an indications of what is to come? Let me finish this months post, with the same words as last month...they seem to be very fitting on a day like today!

If history is any guide, then one could argue that we are getting close to seeing this unusually weak period for the TB coming to an end, and those investors who have withstood the temptation of putting everything in equities...will be the ones collecting the chips as investors head for the Exit!

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.